Proposed changes to US bank capital rules could make supply chain finance less attractive for large lenders and more expensive for corporate users, Baft (the Bankers\u2019 Association for Finance and Trade) has warned.<\/p>\n
Under draft reforms unveiled in March, banks could be required to set aside 10% of supply chain finance (SCF) exposures as up-front capital due to a broadening of the definition of a bank\u2019s \u201ccommitment\u201d to extend credit, purchase assets or issue credit substitutes, Baft said in a comment letter to regulators published this week.<\/p>\n
The plans are part of the proposed US implementation<\/a> of the final tranche of Basel 3 reforms, known in the country as Basel Endgame.<\/p>\n The mooted broader definition of a \u201ccommitment\u201d would apply to banks using the risk-based capital calculation approach, which are typically the very largest US lenders that dominate the market for supply chain finance.<\/p>\n Baft argued the generally short-term and self-liquidating nature of supply chain finance programmes \u201cdoes not warrant a bank having to hold up-front capital\u201d.<\/p>\n \u201cSupply chain finance programmes are not big revenue generators for the banks that host them for the very reason that supply chain finance offers a cheaper form of financing resulting in less profit for the bank,\u201d the comment letter, dated June 18, said.<\/p>\n \u201cAny slim profit that banks gain from supply chain finance purchases or financing in the form of the discount would be outweighed by the new 10% capital set-aside requirement.<\/p>\n Because of their \u201cnarrow margins\u201d, SCF programmes \u201cwould undoubtedly be less attractive for banks to offer\u201d, Baft said.<\/p>\n \u201cSupply chain finance programmes would become less available to those desiring these products and services. US anchored supply chains would be disadvantaged relative to other countries where SCF programs are not subject to these restrictions.\u201d<\/p>\n SCF facilities should not be considered commitments because they are \u201calmost never\u201d legally committed, Baft said, and rarely include a dedicated credit line or limit in the programme documentation.<\/p>\n The Bank Policy Institute, an influential research and advocacy body for US banks, has also called on federal regulators to maintain the current definition of a commitment. It argued the change \u201cintroduces substantial ambiguity\u201d and could result in firms inconsistently interpreting what it called the \u201cunclear expectations\u201d introduced by the proposal.<\/p>\n The new definition of a commitment mooted by US regulators is derived from the Basel Committee on Banking Supervision capital requirement framework that is slowly being implemented worldwide.<\/p>\n While some countries have adopted the framework wholesale, others allow deviation from the text. The EU<\/a> and UK<\/a>, for example, have both maintained a lower treatment of core trade finance products instead of adopting the tougher approach stipulated by the Basel text.<\/p>\n