Edited by Kern Alexander and Rahul Dhumale
Chapter 6: The Basel Capital Rules and Trade Finance
* Andrew Cornford Editors’ abstract: Dr Andrew Cornford analyses the application of the Basel II and III regulatory rules to cross-border trade finance with developing countries. In doing so, he reviews the main instruments of trade finance – i.e., bankers’ acceptances, letters of credit and open accounts – and their importance in international trade finance and the evolution of their regulatory treatment under the Basel Accord. Unlike Basel I, the Basel II capital rules for trade finance were based primarily on market-sensitive risk weights which were procyclical and had the effect of substantially increasing the regulatory capital costs of bank trade finance after the onset of the global economic slump in 2007–2008. This had a disproportionate effect on the costs of bank trade finance for developing countries. Dr Cornford critically examines the recent changes under Basel III to the risk-weights for cross-border trade finance and its impact on developing country finance. Specifically, the Basel III rules concern exposures to trade finance cover two main areas: (1) the one-year maturity floor in the advanced version of the Internal Ratings-based approach to capital requirements for credit risk; and (2) the sovereign floor for certain trade-finance exposures under the Standardised Approach to credit risk. These changes, however, may not be enough to limit the intensity of the procyclical effect of Basel III on the costs of bank trade finance for developing countries. I. NEW BASEL III RULES ON EXPOSURES TO TRADE FINANCE The Basel Committee on Banking Supervision (BCBS) has recently issued revised rules on...
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