WTO brokers trade finance talks for banks, regulators

* Banks, regulators, to discuss trade finance regulation

* Meet again in June

* Banks setting up trade finance default database

By Jonathan Lynn

GENEVA, May 18 (BestGrowthStock) – Banking regulators and commercial
banks have started to discuss ways of ensuring that regulation
does not hamper trade finance — the lifeblood of global
commerce — as the sector shows an uneven recovery.

A meeting hosted by the World Trade Organization on Tuesday
to review the recovery of the $10 trillion market in trade
finance since the crisis brought an official from the Basel
Committee on Banking Supervision around the table with industry
practitioners who fear regulation could undermine the market.

“(This was) a first contact between the regulators… and
the bankers on this particular issue of trade finance,” one
trade finance source who attended the meeting told Reuters.

Regulatory issues affect huge sums for banks active in the
market that underpins the $12 trillion in world trade through
traditional, short-term loans.

For instance the current Basel II regulations treat all
short-term loans as if they run for at least one year, requiring
banks to set aside capital accordingly.

At their London summit in April last year, G20 leaders urged
regulators to be flexible in this for trade finance, but only
Britain’s Financial Services Authority (FSA) has waived the
one-year rule for the industry.

TIED CAPITAL

The representative of one major bank in the industry told
the meeting that if all other regulators followed the FSA, his
bank would save $10-15 billion in capital on trade finance.

That could finance 10-12 times as much again in trade.

The meeting heard that 95 percent or more of trade finance
deals — collateralised on the cargo and self-liquidating — for
manufactured goods run for 60-90 days. For commodities it is
less, with an oil cargo typically turned around in 38 days.

Because trade finance is a low-returns business, it cannot
compete with more glamorous areas such as investment banking or
forex trading at the best of times.

Regulations already make it unprofitable for many of the big
international players, who are only sticking with it because
they need to provide a full range of transaction banking
services to their global clients, sources at the meeting said.

Banks fear further pressure on margins will come from
proposed regulations known as Basel III that will impose a
liquidity ratio to tax off-balance sheet items, where many banks
hid toxic assets in the run-up to the crisis.

Because basic trade finance instruments such as documentary
letters of credit are held off balance sheet until they are
verified and become irrevocable commitments, this will hit trade
finance banks hard, especially as 75 percent of such letters are
never confirmed.

To back their contention that trade finance is twice as safe
as other forms of lending, banks have agreed to pool data on
default rates in a project managed by the International Chamber
of Commerce (ICC), which sets letters of credit standards and
arbitrates disputes, and funded by the Asian Development Bank.

The meeting heard that 8-10 leading banks in the sector will
provide five years of proprietary data in a pilot project for
the defaults database — enough to test the highs and lows of
the business cycle.

The Basel regulator was receptive but, like WTO
Director-General Pascal Lamy, stressed the need for hard data,
sources at the meeting said.

“Very encouraging — the dialogue will continue,” said one
banker.

Bankers and regulators will meet again on trade finance in
June, once in Frankfurt and once in Seoul, the sources said.

Banks attending the meeting include Royal Bank of Scotland
(RBS.L: ), Citigroup’s (C.N: ) Citibank and HSBC (HSBA.L: ).

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(For story on state of trade finance click on [ID:nLDE64H2DK]
(Editing by Stephanie Nebehay)

WTO brokers trade finance talks for banks, regulators