Chapter 5 Future developments
mean banks will have to hold 7% of risk-
weighted assets in Common Equity (or Core
Tier One capital) (inclusive of a new capital
conservation buffer of 2.5%, which banks may
deplete in times of financial stress). Banks
that are classified as ‘Systemically Important
Banks’ (SIBs) will be required to hold between
1% and 2.5% above the minimum Common
Equity requirements. During periods of credit
growth an additional counter-cyclical capital
requirement of up to 2.5% may be imposed by
local regulators. (This will have a significant,
albeit indirect, effect on the way banks decide
to offer particular products, including trade
finance.) These changes are being phased in
from January 2013.
When CRD IV comes into force (either in
January or July 2014), there will be changes
to the calculation of risk-weighting to be
applied to some exposures (e.g. the Financial
Institution Asset Valuation Correlation
(FI AVC)), as well as new risk-weighted
asset (RWA) requirements (e.g. the Credit
Valuation Adjustment (CVA)).
A liquidity coverage ratio (LCR) will be
introduced from January 2015, under which
banks will have to hold a liquidity buffer of
unencumbered, high-quality liquid assets
to cover net cash flows over a modelled
stressed scenario of 30 days. The full LCR
will be phased in between January 2015
and January 2019 using regulatory minimum
levels in each year.
In addition to the LCR, a net stable
funding ratio (NSFR) will be enforced from
January 2018, requiring banks to fund the
illiquid portion of their asset book with funding
of more than one year residual maturity.
A new leverage ratio of 3% is due to
become mandatory in 2018, although public
disclosure of the ratio is required by 2015.
This seeks to ensure banks apply adequate
capital to all their exposures, including those
off balance sheet, and without applying any
risk weightings. This will have a significant
impact on banks without diversified business
portfolios (e.g. trade services focused or
mortgage focused).Upgrading Basel II
In 2004, Basel II introduced a risk-sensitive
calculation to the existing requirementfor banks to hold 8% of their exposures
as regulatory capital, resulting in their
needing to hold 8% of RWAs as regulatory
capital instead. Basel III adds to these
requirements, by focusing on loss-absorbing
Common Equity rather than regulatory
capital. It introduces revisions that will
result in increased risk weightings for some
exposures (e.g. FI AVC), and introducing
additional risk components, such as the CVA
capital charge, that cater for credit migration
of the portfolio.
However, whereas Basel II (and Basel II.5)
primarily focused on capital as a prudential
measure, Basel III moves beyond this to
consider the broader shortcomings in the
global financial system, addressing the need
for stable liquidity and reduced leverage.
Basel III changes a bank’s cost base
with extending trade facilities as well as
when taking deposits. As a result, the
market will have to find a new equilibrium
to finance the revised cost base, either
through price or finding innovative ways to
meet customers’ needs.
To understand how Basel III will affect
trade finance, we need to examine three
separate measures: the introduction of the
asset value correlation multiplier for large
financial institutions, and the new liquidity and
leverage ratios.Financial Institution Asset Value Correlation
(FI AVC)
The FI AVC is one of the Basel III measures
intended to address the risks stemming
from the interconnectedness of the global
financial system.
It affects the cost of financing of a bank’s
exposure to the world’s largest regulated
financial institutions (with over EUR 70 billion
of assets), as well as all unregulated
financial institutions, as the RWAs on such
counterparties will increase by 20–35%. From
a trade perspective this would impact trade
products, namely export letters of credit,
guarantees and the short-term bilateral trade
finance facility with such financial institutions.Liquidity Coverage Ratio (LCR)
The LCR is being introduced to ensure
financial institutions hold sufficient High-