Daily News: March 21, 2013

Basel III Opens Door for Alternative Sources of Trade Finance


Greenwich Associates says in a new report that the new Basel III bank capital requirements are poised to increase pricing on trade finance, an essential component of international trade. Greenwich concludes that such an effect could accelerate the development of alternative sources of credit including trade finance funded by non-bank investors.

In the new report entitled, Global Trade Finance: Basel III Capital Rules Open Doors For Alternative Sources Of Funding, Greenwich documents mounting concerns among companies around the world about the possible impact of Basel III. An increase in trade finance costs would have a particularly large and negative impact in Asia, where companies’ reliance on trade finance as a critical source of funding is higher than in developed markets.

Already, European banks that have been major suppliers of trade finance in Asia are pulling back, largely as a result of the new capital rules. Although local Asian banks and Japanese banks are stepping in to fill that void, conditions appear to be in place for the emergence of alternative sources.

One of those sources will likely be trade finance funded by non-bank investors, with participation facilitated via institutional funds or structured products. “In the current era of historically low interest rates, investors hungry for sources of attractive returns could be enticed by the incremental yield, low volatility, low duration and diversification benefits of trade finance,” says Greenwich Associates consultant Markus Ohlig.

Despite some real obstacles to growth, Greenwich said it believes it is only a matter of time before trade finance becomes a viable asset class for investors, and non-bank investor capital becomes an important source of funding for trade finance around the world. With Basel III capital rules providing banks with an incentive to make investments in the development of new vehicles and investors eager for yield opportunities, the stage is set for an eventual boom in non-bank funded trade finance.

To read the full report, click here.