Trade financing costs set to soar under Basel III

Tuesday 12th October 2010

New Zealand businesses will find it harder to fund their export operations with the cost of trade finance set to soar fivefold under the new capital ratios proposed by Basel III, according to credit reference agency Dun & Bradstreet.

Under the new requirements being considered to strengthen the global banking system in the wake of the financial crisis, traditional trade finance facilities will have their risk weighting increased from 20% to 100%. These facilities, which include letters of credit, account for around 30% of world trade, according to report.

Dun & Bradstreet said it expect banks that provide trade finance will either pass this increased cost on to their customers or divert funds to other more profitable activities, resulting in deteriorating trade finance conditions for companies, particularly among those exporting to emerging markets where letters of credit are the primary means of securing sales and payment.

New Zealand is seen to be particularly hard hit, with exporters selling a significant portion of their goods to emerging markets in the Asia-Pacific region. If the reforms are passed, firms are expected to take on more trade funding themselves, which is expected to increase counterparty risk on international deals.

“There is no doubt that Basel III reforms will address real systemic weaknesses that emerged in the global financial system,” said general manager John Scott.

“However, regulators need to be mindful of the implication at the firm level and ensure that unintended consequence don’t emerge that could further do harm to the economy.”

The research firm said finance facilities have not historically been high risk instruments as they are supported by underlying transactions and identifiable goods, and is recommending that they be exempt from the Basel III capital requirements.

“A lack of trade finance contributed significantly to the sharp contraction in world trade during the financial crisis and we need to ensure we don’t create another set of circumstances that weaken the global trading environment,” Scott said.

Dun & Bradstreet said the reforms and their effects on slowing trade contributed to its subdued outlook for world growth, which expects the global economy to expand by 3% this year, and 2.7% in 2011.

Businesswire.co.nz

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