Stricter Capital Requirements Seen to Reduce Take up of Trade Finance Products

The impact of Basel III on the global economy is largely unknown but stricter capital requirements for banks will undoubtedly change the landscape for a range of industries, according to a whitepaper released by Accuity.


The ‘Basel III: Meeting the Challenge of a New Regulatory Environment’ report reveals that one such casualty of Basel III is likely to be Trade Finance, deemed a riskier funding instrument due to risk related capital and liquidity buffers.


Despite two-thirds of European companies currently funding Asian and North American trade through trade finance, 80 percent of financial executives recently surveyed by Greenwich Associates, expect pricing on trade finance products and services to increase under the regulation with many products being abandoned altogether. This is particularly prevalent in Asia where trade finance is a critical source of funding and pull backs in response to Basel III have recently been felt.


As the roll out for the Basel III recommendations takes hold, many banks are looking at transforming their business models accordingly. With the last of the ratios not in place until 2019, the long transitional phase can be deceiving. Adopting a ‘wait and see’ approach to compliance is not an option.


The CRD IV Directive under Basel III focusing on transparency, remuneration, the introduction of buffers and enhanced governance currently runs to over 1,000 pages with a further 200 reference points to be determined. 


Given the sheer scale and complexity of Basel III, a number of compliance and risk management processes should be adopted in preparing for the changing landscape.


According to the whitepaper, banks must focus on better data management, ensuring automated and robust conciliation procedures and centralised information systems are in place.


The study also suggests the re-examination of business models in accordance with new risk appetites, impacting capital to lend, margins and ability to withstand stress.


Banks are also being urged to develop capital and liquidity strategies to prepare for the new environment, to include changes to business models, pricing strategies and product offerings.


They should also focus on maximising risk, capital and liquidity management process enhancements to withstand risk and ensure adequate processes are implemented, says the whitepaper.


The report also highlights the importance of keeping up to date with latest regulatory developments, and developing a roadmap to reduce risk and ensure Basel III compliance.


Regardless of whether banks adhere to Basel III, they are required to publish their regulatory capital and capital ratios. Accuity’s Credit Risk solution compiles this information, alongside spread data, ratings and risk intelligence to support client onboarding and make reliable credit risk decisions.


“Basel III is one of the most important reforms to emerge from the events of 2008, striving to manage systematic risk and ensuring greater sustainability in the global financial system," says Robert McKay, Managing Director at Accuity. "Whilst, the full implementation of the regulation won’t complete until 2019, many regulatory jurisdictions, especially in Asia, expect to impose tougher standards years before the official deadline. In order to prevent a repeat of the financial crisis, it is essential that banks act now, embracing key compliance processes and meeting new standards to minimize disruption to the business of banking.”


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