COC

Bank practices, more than Basel II itself, responsible for trade finance decline (January 2010)

Rethinking Bretton Woods | Mon, Mar 8, 2010

 “Questions and Answers on Basel 2 and the agenda for regulatory reform”, a set of remarks prepared by Andrew Cornford for the G24, evaluates the role that the Basel II on capital requirements may have played on the reduction in trade finance during the global financial crisis.

It should be noted the question of the impact of Basle II agreement on the availability and terms of trade finance has been the matter of complaints by developing countries. An example of this is a communication that Brazil addressed to the WTO in October 2008 (WT/WGTDF/W/39). Brazil submits that “the Basel II potential effects on trade flows, inter alia, through trade finance should be a matter of special interest to the [WTO] Working Group on Trade, Debt and Finance.” More recently, at a meeting convening Finance Ministers and Central Banks from 17 Asian countries, call for “a revision of the Basle II rules to ensure that trade financing is not unnecessarily constrained by capital adequacy rules.” (see http://www.coc.org/node/6444 for more information)

Mr. Cornford’s remarks suggest that “contractions in trade finance accompanying the introduction of Basel 2 are due principally to changes in banks’ practices regarding the pricing and other terms of their loans which are part of the more rigorous risk management that was one of Basel 2’s collateral objectives.”   

 

As a result, he says, the appropriate policy response “would appear to lie in regulatory surveillance and the provision of advisories to banks and borrowers, especially during the period when bank lending is also under several other pressures due to the credit crisis and macroeconomic conditions."

 

Click here to download full remarks.