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Basel III: where do we stand?

Oliver Gordon catches up with some leading figures to discuss whether trade finance is still being unfairly penalised under the Basel III framework.

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Comments (1)

  • Nicholas Budd
    Nicholas Budd, International Trade Finance 21 September 2015

    The management of working capital loans is a universal problem for banks and regulators alike, whether the borrower is an SME in England or Kenya or a metal producer in Russia or Brazil. Unfortunately there is no substitute for trade and back office resources within the financial institution (or the credit enhancer), and the regulators are right to be reluctant to relax prudent lending controls based only upon the nature and duration of the transaction. Most of the billions in failed loans made by the hundreds of shadow banks in China would qualify as trade finance transactions under the current standards, not to mention the failures of many large trading houses in North America and Europe. What is missing, and needed, to make these transactions demonstrably safe is trade-specific expertise, internal KYC policies, effective collateral management and insurance against catastrophic losses, back office loan supervision resources, and the ability to react quickly and effectively if anomalies arise. It is obvious that finance is the life-blood of trade so banks should be incentivised by the regulators to make the necessary infrastructure investment to render these transactions safe while at the same time keeping the transaction costs manageable. However, banks without the necessary resources should not enjoy capital adequacy relief by entering into “structured” transactions to or through large trading companies or lending against receivables. Unfortunately for the banks and regulators, there is yet no metric for determining when and if a bank has met this operational threshold, and legal opinions and insurance products are only useful if the underlying management is in place.

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