Trade Finance Carries Relatively Low Risk, Says ADB

Trade finance carries a relatively low probability of loss and therefore should be considered a different asset class from more risky forms of finance, according to the Asian Development Bank (ADB) and International Chamber of Commerce (ICC) which met with the Basel Secretariat to discuss the findings of the ICC-ADB Trade Finance Default Register in relation to impending Basel III rules on bank capital adequacy.


"We believe this meeting represents the beginning of a dialogue with the Basel Committee on a number of fronts in relation to Basel III, including potential unintended consequences on global trade as well as methodologies to refine collection of data to demonstrate what we all know intuitively: that trade finance carries relatively low risk," says Kah Chye Tan, Chairman of ICC Banking Commission.


The Switzerland-based Basel Committee on Banking Supervision formulates standards and guidelines in banking supervision, which are followed by many national regulators. The Committee is currently finalizing the details of a new set of guidelines, named Basel III, following the recent global financial crisis.


Banks argue that current and proposed rules impose capital requirements on trade finance that are disproportionately high considering the safety of such financing. These rules, banks say, force them to lock up funds that could be used to support trade, and discourage them from extending more.


Trade finance is needed to grease the wheels of trade, a major source of employment and economic growth. Banks provide the finance for a third of world trade.


"There is broad support for Basel's work in tightening capital requirements to make the global financial system more robust,” says Steven Beck, Head, Trade Finance at ADB. “However, Basel rules should not treat trade finance the same as other riskier products, otherwise global trade, especially in emerging markets, will suffer. That means slower economic growth and fewer jobs, and makes it harder to achieve Millennium Development Goals on poverty reduction."





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