The Basel Journey – Guide to Regulatory Impact on Transaction Banking

1. The Basel Journey – Guide to Regulatory Impact on Transaction Banking Jack Insinga Director, Transaction Banking Standard Chartered Bank January 25, 2012

2. The Basel journey began in 1988 Basel I Introduced in 1988, it strengthened the soundness and stability of the international banking system and laid the foundation for a consistent application of rules across international banks. Basel II Introduced in 2005, it focussed on risk differentiation. Banks had to maintain capital for operational risk, in addition to credit and market risks. They also had to set aside more capital when extending credit to financially weaker companies and vice versa. The range of implementation approaches (Standardised, Foundation and Advanced) enabled national regulators to exercise discretion when determining a bank’s state of readiness for Basel II implementation while continuing to stay focussed on compliance with min requirements. Basel III Introduced in 2010, to raise both the quality and quantity of the regulatory capital base and to expand the risk coverage of the capital framework to include other risk areas. Introduced Leverage and Liquidity ratios to prevent excessive build-up of leverage and to ensure sufficient liquidity in the international banking system. The Basel Accords were drafted by the Basel Committee on Banking Supervision. The committee comprises central bank governors and regulators from developed and developing countries 2

3. Impacts of Basel on trade financing and the world economy Impacts on global economy $270 billion or a 1.8% reduction in international trade flows 0.5% reduction in global gross domestic product Billions of dollars of liquidity held as central bank reserves against trade financing; instead of being used to support international trade flows Impacts on businesses Reduction in the supply of trade financing by as much as 6% as capital costs of financing trade increases Increase in trade finance pricing by 20% to 40%, with disproportionate increases for small and medium sized enterprises in the low income emerging countries Increased scrutiny on trade documentation, stricter loan covenants and request for collateral makes accessing whatever available trade credit difficult and slow. Increased capital and liquidity requirements for low-risk trade financing and pressure from shareholders to increase returns on equity will make it less attractive for banks to offer these products 3 3

4. Key Messages • --Waiving the one-year maturity floor on trade L/c’s • Response: all other trade loans and receivables financing remain outside of the one-year floor. L/c’s only represent 20% of trade instruments thus it ignores that 80% of global trade is open account and could be financed by non L/c instruments like trade loans and receivable financing. • --Waiving the so-called sovereign floor for certain trade-finance related claims on banks using the standardized approach for credit risk • Response: Under the standardized approach, the 50% or 20% risk-weighting can be used irrespective of the sovereign rating of the country. This will only benefit imports by poor countries in particular where low sovereign ratings generally raise capital requirements on trade. Exports from poor countries to richer countries, which is still the majority of their trade, is not impacted. • --No mention about liquidity • Response: Base lll creates new costs related to liquidity requirements for contingents. Trade is assigned the same ratio as corporate loans. The new provisions are silent about reducing liquidity requirements for trade contingents. Costs will rise for both import and exports to and from low income countries under L/c’s.