US banking regulators\u00a0have\u00a0proposed\u00a0maintaining\u00a0the current capital treatment of\u00a0key\u00a0trade finance\u00a0products\u00a0as part of\u00a0the country\u2019s\u00a0adoption of the latest tranche of Basel reforms.\u00a0\u00a0<\/p>\n
If the proposals unveiled on March 19\u00a0are implemented, trade-related\u00a0contingent\u00a0instruments with a maturity of one year or less will\u00a0retain\u00a0a\u00a020%\u00a0credit conversion factor\u00a0(CCF),\u00a0which\u00a0denotes\u00a0how much capital\u00a0must\u00a0be\u00a0held\u00a0against\u00a0a\u00a0given\u00a0exposure.\u00a0<\/p>\n
Transaction-related contingent items\u00a0with a maturity of more than one year, such as\u00a0performance\u00a0standby letters of credit,\u00a0performance bonds\u00a0and bid bonds, will\u00a0retain\u00a0a CCF\u00a0of 50%.\u00a0\u00a0\u00a0<\/p>\n
Across the entire reform package, the\u00a0capital burden of the\u00a0biggest US lenders such as Bank of America, Citi, JP\u00a0Morgan\u00a0and Wells Fargo will\u00a0be\u00a0cut by around 4.8%,\u00a0the Federal Reserve said.\u00a0Capital requirements for smaller banks with less than US$100bn in assets will be trimmed by 7.8%.\u00a0<\/p>\n
Banks and other interested parties\u00a0have until mid-June to respond to the proposal.\u00a0<\/p>\n
Industry associations cautiously welcomed the plans,\u00a0which\u00a0represents\u00a0a drastic shift from the US\u2019 first attempt\u00a0to adopt the final package of Basel reforms in 2023. That approach envisaged much tougher capital rules and triggered a fierce backlash from lenders.\u00a0\u00a0<\/p>\n
\u201cFrom an overall perspective, we are glad to see that these\u00a0proposed\u00a0capital charges are more calibrated in respect to risk,\u201d said Tod\u00a0Burwell, president of the Bankers\u2019 Association for Finance and Trade (Baft).\u00a0\u201cWe will continue to review this in more detail to understand the implications\u00a0for\u00a0trade finance and the response\u00a0to previous concerns\u00a0raised, and\u00a0will provide comments accordingly.\u201d\u00a0<\/p>\n
Under the\u00a0US\u00a0plans, the country\u2019s banks\u00a0will continue to be\u00a0required\u00a0to\u00a0allocate\u00a0more capital to longer-tenor trade finance products than their EU and UK rivals.\u00a0<\/p>\n
In the UK, off-balance sheet trade finance products have a CCF of 20% regardless of maturity. In the EU, the European Banking Authority\u00a0deems\u00a0trade finance products to\u00a0\u201cgenerally\u201d<\/a>\u00a0have a maturity of less than one year, however market sources have previously told\u00a0GTR\u00a0that most banks interpret this as allowing a\u00a020%\u00a0CCF\u00a0to instruments with longer tenors.\u00a0<\/p>\n