Work needed to promote fair regulatory treatment of trade finance, report says

The International Chamber of Commerce (ICC) Banking Commission has pressed the trade finance industry to collaborate to ensure that the existing trade finance gap does not worsen as a result of excessive regulation and compliance requirements.

Banking regulation and the campaign to mitigate the unintended consequences for trade finance, takes a close look at the regulation and compliance requirements that have come into force since the 2007 financial crisis and the industry’s subsequent efforts in promoting their fair treatment of trade finance instruments.

While well-meaning, these requirements have unintentionally led to the exacerbation of the US$1.5 trillion gap between the demand and supply of trade finance, which has especially impacted those most in need of financing, particularly in emerging markets.

Olivier Paul, Director, Finance for Development, ICC said: “Discussion and exchange with regulatory bodies is required at the earliest possible stages of the decision-making process, however, if we are to achieve the best results for the industry. As the only private sector Observer to the UN General Assembly and a leading voice for global business across intergovernmental forums, ICC is uniquely positioned at the forefront of discussions, leading the way in making trade finance more accessible for all market participants.”

“Clarification and harmonisation of regulation are fundamental to mitigating the serious threat that de-risking poses to the financial system. ICC, for its part, is proactively working with regulatory bodies worldwide to promote the fair treatment of the industry and increase access to the market.”

Improved treatment of trade finance

The report examines a number of areas where successful lobbying has led to improved treatment of trade finance instruments, notably:

• The amendment of Article 55 of the Bank Recovery and Resolution Directive (BRRD), allowing banks to apply for a waiver with the Single Resolution Board if they consider there to be obvious explanations that justify not applying the rule.
• The reduction in Net Stable Funding Ratios (NSFR), allowing for more competitive rates in comparison to other jurisdictions.
• The exoneration of the leverage ratio for some export credits extended by commercial banks and covered by official export credit agencies.

“Despite the progress achieved to date, significant work remains to be done,” Paul added. “With regulatory adoption and implementation processes taking up to a decade, it is essential that discussions take place from the earliest of stages if we are to effect efficient and meaningful change.”

With regulatory adoption and implementation processes taking up to a decade, however, the industry must maintain a proactive approach to promoting a fair regulatory environment for trade finance.

Remaining relevant through digital

The ICC report – which can be downloaded in full here – also outlines how digitalisation could help to increase cost and time-efficiency, aiding the fulfilment of compliance and regulation requirements. Distributed ledger technology, for example, could help make transactions more secure, by giving more power to banks and regulators to trace and evaluate financing, in turn alleviating some risk.

Last month, a report published by BNY Mellon titled ‘Overcoming the Trade Finance Gap: Root Causes and Remedies’ found that the trade finance gap remains a significant issue for worldwide trade. This research ranked technology and regulatory revision as the two most effective ways of helping to reduce the trade finance gap, according to the survey.