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Following issuance by three US regulatory bodies of a notice of proposed rule (NPR) that would substantially revise the capital requirements applicable to banking organizations with significant trading activity, the Bankers Association for Finance and Trade (BAFT) responded to the agencies’ request for comment on implementation of the proposed regulatory capital rule, which has been referred to as the “Basel Endgame”.
In its letter of 16 January 2024 to the three US agencies – Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) – BAFT requested that proper consideration be given to the treatment of trade finance, particularly in six specific areas: Defaulted Exposures; Risk Weights for Bank Exposures; Tenor for Trade Instruments; Credit Conversion Factor (CCF); Operational Risk; and Commitments.
Among its recommendations in these areas, BAFT contends that “[t]rade settlements greater than 90 days should be carved out of the defaulted exposures where the delay is for operational, not credit reasons.” For the “more than well capitalized banks”, BAFT advocates for a 20% risk weight. As regards tenor for trade instruments, BAFT asks that US regulators expand the short-term risk weight to extend the tenor to 6 months instead of the proposed 3 months “and to include unfunded and funded trade finance exposures and cover both goods and services”. In view of the NPR’s intention to apply a 50% CCF for performance standby letters of credit and similar performance instruments, BAFT is requesting adjustment to a 20% CCF which is the standard adopted by the EU. Noting the high volume, low margin revenue nature of fee-based trade finance activities and that actual losses arising from them “are next to zero”, BAFT asks that the agencies revise the operational risk framework. In line with the stance taken elsewhere, BAFT asks that certain arrangements be exempt from the definition of commitments “if certain conditions are met and where these apply to corporates only where counterparties are closely monitored on an ongoing basis.”
In its 15-page letter, BAFT goes on to make the case that trade is an engine for global growth and outlines reasons why trade finance should be preserved for its role in the U.S. economy.
Drawing on ICC Trade Register data, BAFT then addresses detrimental implications of the regulators’ Basel Endgame proposal and imparts on them “that the unique characteristics of trade finance have been well and objectively demonstrated and should be appropriately reflected in the proposal.”
In the second half of its letter, BAFT comments on select specific questions put forth in the NPR. Of particular note in the area of operational risk, BAFT expressed concern about possible duplication of capital changes for LCs. “Under existing guidelines [risk-weighted assets] will already be allocated for the letter of credit, but under the new proposal it appears that the fees associated with a letter of credit, such as advising fees, discrepancy fees, amendment fees, cancellation fees etc., will also be subject to capital charge as operating fees. We ask that this be clarified”, stated BAFT.
QUOTE TO NOTE
"Our goal is to achieve appropriate treatment and an internationally level playing field, where U.S. banks and their corporate and SME clients are not placed at a comparative disadvantage and regulatory arbitrage is not a consideration."
by BAFT Comment Letter to US Agencies on the Implementation of the Basel Endgame Notice of Proposed Rule, 16 January 2024
The full text of BAFT’s Comment Letter is available here on the BAFT website. To view the Proposed Regulatory Capital Rule, go to 88 FR 64028 on the Federal Register website.