CRR hit to trade-finance banks should be avoided
The banking sector appears to be quietly confident that the European Commission will row back on new regulation that, if enacted, could notably increase the cost of some trade-finance instruments.
The EU capital requirements regulation (CRR), as initially proposed in October 2021, would have seen a credit conversion factor of 50% imposed on certain trade-finance instruments – up from the current 20% treatment.
It would also have set a fixed maturity at 2.5 years for all trade-finance instruments. The credit conversion factor is a calculation of exposure risk.
It is no surprise that the impact of this is the subject of intense focus throughout the industry.
The International Chamber of Commerce (ICC) brought together a group of banks and corporates to lobby the EU to leave the factor unchanged, arguing that trade-finance instruments are low risk and highly unlikely to generate significant balance-sheet exposures.
Banks will be very picky when funding clients, so SMEs and some mid-corps may find it very difficult to get bank funding
This view is shared by the European Council and gained further support earlier this year when the European Parliament’s Economic and Monetary Affairs Committee voted to maintain the 20% level. It is also supported by corporates concerned about the potential increase in the cost of technical guarantees, which according to the ICC Trade Register report have a default rate of just 0.24%.