ICC Says Regulation Limits Trade Finance

UBS shed light this week on a persistent challenge in the traditional financial services industry.

Reports in Reuters on Tuesday (May 28) said UBS expects its regulatory costs to remain high in the years ahead after a decade of more stringent regulations leading to heavier, more costly burdens on banks.

“We’ve had 10 years of enormous regulation,” UBS Group Chief Compliance and Governance Officer Markus Ronner said, according to the report. “That has tied up enormous resources.”

It’s a challenge that has weighed particularly heavy on banks’ ability to address the global trade finance gap, according to the International Chamber of Commerce (ICC).

The ICC’s Banking Commission published a white paper Tuesday, “Banking regulation and the campaign to mitigate the unintended consequences for trade finance,” that warns ongoing red tape is preventing the financial services sector from broadening access to trade finance, resulting in a persistent gap of this type of funding worth an estimated $1.5 trillion.

“Clarification and harmonization of regulation are fundamental to mitigating the serious threat that de-risking poses to the financial system,” ICC Director of Finance for Development Olivier Paul said in a statement. “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.”

Basel III requirements that a bank’s Tier 1 and Tier 2 capital must amount to at least 8 percent of risk-weighted assets, with even more stringent capital requirements for 29 banks considered to be global systemically important, have established internationally accepted capital requirements for financial institutions in the wake of the 2008 financial crisis. Further enhancements to resolution requirements, also resulting from the financial crisis, have also played a part in promoting the resiliency of the global banking sector, yet with the unintended consequence of restricted access to capital for some borrowers, including small businesses.

The ICC pointed to Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance requirements that have also forced banks to reallocate resources and heighten risk management, similarly tightening banks’ trade financing capabilities.

In addition to more stringent regulation, a lack of standardization of such regulation has also led to reduced access to trade finance, the ICC’s Banking Committee concluded, particularly as a result of the Basel Committee on Banking Supervision allowing individual EU Member States to write Basel III requirements into their own legislation.

More complex regulations, coupled with “uncertainty and variance” in the rules, have not only reduced banks’ trade finance operations, but have also had a negative impact on FIs’ correspondent banking relationships in further de-risking efforts.

“Why is this so significant?” The report explains, “Correspondent banking relationships are critical for bridging the link between emerging markets and the global economy.”

These de-risking efforts are having particularly broad effects on small and medium-sized businesses in emerging markets, the ICC stated, “given they are likely clients of the banks being cut adrift from international trade finance. This only exacerbates the preexisting gap between the demand and supply of trade finance.”

In 2017, an estimated 40 percent of financing requests from micro, small and medium-sized businesses (SMBs) were denied. To tackle this issue, the ICC is calling on regulators to clarify and streamline their banking rules, and for banks to strengthen correspondent banking relationships, both of which are necessary efforts to connect SMBs to trade finance in emerging markets (unfortunately, the World Bank Group’s International finance Corporation found last year that 27 percent of 300 global banks reported a decline in the number of correspondent banking relationships they have in place).

Digitization of finances is also helpful in strengthening banks’ underwriting efforts, the ICC noted, and while FinTech may introduce data security challenges, it could ultimately prove beneficial not only to strengthen SMBs’ access to capital, but to addressing regulatory compliance challenges for the banks themselves.