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Thierry Sénéchal, an economist by training, is Policy Manager with the ICC, overseeing the work of both the Financial Services and Insurance Commission and the Banking Commission. His prior experience included senior postings both in private and public sector organizations, formerly as Director, Regulatory & Public Policy Division of Mazars Group (20012005) and as a senior economic officer at the UN Security Council (1997-2001).

DCI: Since taking over the policy management of the Banking Commission two years ago, you have expanded its role beyond its rule-making function into a number of new fields - money laundering, forfaiting, Basel II, responses to the financial crisis and so on. How are the members reacting to this broadened role for the Commission?

Sénéchal: I have not only been expanding in terms of projects. The Banking Commission has been attracting more than 250-300 delegates to each meeting since my arrival, and its membership has significantly increased, especially with delegates from emerging markets, which was my priority. This increase in the number of members requires a revised strategy.

In terms of projects, we had to expand our horizon for different reasons. First, we had to service the new membership and focus on issues close to emerging market economies. Second, the financial crisis prompted more work, especially in the effort to bridge the information gap. The Survey "Rethinking Trade 2009" presented in Dubai on 12 March and to the World Trade Organisation (WTO) on 18 March, required a complex organization involving developing a survey, creating partnerships with different organizations, such as SWIFT, EBRD, IFC, etc.

It's true that other projects such as the URDG revision, the Basel II initiative, the Trade Credit Bureau, anti-money laundering, the launching of forfaiting rules, the revision of DOCDEX procedures, etc., will consume quite a lot of time and energy. For these, we have developed cooperative arrangements with organizations such as the Asian Development Bank (ADB), SWIFT and the like. But even with that, it's clear we will need more resources.

DCI: With regard to this report on how the financial crisis is affecting trade finance that you prepared for WTO, what methodology did the Banking Commission use to collect the information used in this report?

Sénéchal: The methodology was primarily based on a 27-item questionnaire developed to collect information from the trade finance banking members of the participating organizations. The Survey questions targeted trends occurring in trade finance operations of banks between the last quarter of 2007 and the last quarter of 2008 to highlight the impact of the credit crisis. Given the urgent need for information and the short time frame available to collect it (December 2008 to March 2009), the Survey was conducted online. The questionnaire was made available to participants from 4 February to 22 February 2009.

Specifically, the Survey questions addressed a number of issues: a breakdown of traditional trade finance products handled within banks; the trends in volumes and values of traditional trade products; the trends in demand and pricing for bank undertakings and L/C confirmations; the operational impact of the credit crisis, etc. Coastline Solutions, ICC's information technology partner, was responsible for the collection of the data. The Survey received responses from 122 banks in 59 countries. Using the feedback received, we are able to provide some elements of consensus on key issues arising from the crisis.

DCI: What are one or two of the most important conclusions the report reached and will there be any follow-up to it?

Sénéchal: The Survey reached a number of important conclusions. Here I'll mention only a couple. First, it confirmed an overall decrease in volume and value of L/Cs. Some 47 per cent of banks surveyed reported a decrease in export L/C volume. Similarly, 43 per cent of banks reported a decrease in the L/C value of aggregate transactions. Second, we found that trade finance is still open today but limited. Shortage of liquidity and disproportionate aversion to risk have driven up interest rates on loans and advances in many countries, especially in emerging markets. Some 52 per cent of respondents indicated that they had experienced an increase in confirmation requests between the last quarter of 2007 and the last quarter of 2008. This reflects the increased security sought by exporters and a heightening of the perceived payment risk of the country of the issuing bank.

As to a follow-up, the WTO is pushing hard for the Banking Commission to carry out another Survey. They wanted something for the autumn of 2009, but we reached the conclusion that the best timing would be early 2010. For results to be meaningful, we believe that at least one year should elapse between the two Surveys.

DCI: The Commission is also becoming involved in another project called the Credit Bureau. Can you explain what this is and how it would work?

Sénéchal: This project is still in the early stages with a feasibility study being financed by the ADB. The purpose of the Credit Bureau would be to obtain, maintain and hopefully analyze historical and future worldwide data on trade finance defaults. These data would be used to assist risk management staff and regulatory bodies across the world to better evaluate trade finance risk.

Trade finance has long been recognized as having a lower risk profile than regular unsecured bank credit. This is due to the short-term nature of trade, its revolving nature, and the fact that trade finance is usually backed by trade finance instruments such as letters of credit, collections, etc. However, there has often been a reluctance by bank credit controllers to fully accept this fact when approving trade finance limits and by governing authorities when considering issues such as the Basel Agreement and capital adequacy considerations.

The major difficulty in making the case that trade finance has a lower risk profile than unsecured bank credit, is the lack of concrete information about defaults and credit losses in trade finance. Bank staff often have to resort to persuading their risk management departments that this is the case when their bank's standard regulations do not account for it. Making the case for regulators and Basel II, etc, is similarly impacted.

The project, if it's given the go-ahead by the Commission, could involve developing benchmarks for risks and risk management that could be a model for banks, either in a specific region or worldwide.

DCI: I suppose this ties in with the Banking Commission's recent policy proposals on Basel II made to the leaders of the G-20 nations?

Sénéchal: It does. Basel II came under major scrutiny from our members in recent months. The last G-20 meeting of April 2009 highlighted the need to make use of available flexibility in capital requirements for trade finance. ICC members have also sought such flexibility in recent months. In particular, concerns about the impact of Basel II capital adequacy requirements on the availability of trade finance were raised by our members on several occasions. For instance, industry participants at the WTO Expert Group meetings on Trade and Finance in November 2008 and March 2009 discussed in great length the availability of trade finance but also the implications of Basel II on their operations.

The feedback we have received from ICC members shows remarkable consistency. It appears that most banks are facing tougher capital requirements for their trade assets. In this connection, we believe that the financial crisis has brought into sharp relief an ongoing trend whereby the implementation of the Basel II charter has eroded the incentive of banks to lend trade finance, due to pronounced capital weightings that are not fully reflective of the low-risk level of the activity. The results of our consultations indicate that these increases in capital requirements have had particularly adverse consequences on trade lending to SMEs and counterparties in developing economies.

Specifically, we made several recommendations to the G-20. First, we recommended exempting trade finance products from the one-year maturity floor applied to lending facilities. Within national discretion, Basel II allows for the exemption of the one-year maturity floor for "short-term self-liquidating trade transactions". This is because the contractual maturity of trade finance products is reflective of the time horizon over which banks are exposed to a credit risk. Such discretion has already been exercised by a small number of national regulators. Our initial analysis suggests that removal of the maturity floor has the potential to cut capital requirements for trade finance obligations of 90 days maturity by around 20-30 per cent.

The Commission also recommended that key risk attributes be determined on the basis of industry benchmarking: As noted above, many banks face difficulties identifying and isolating sufficient data to produce objective estimates of risk attributes for trade lending.

DCI: The Banking Commission has formed two working groups: one on anti-money laundering (AML) and one on forfaiting. What do you expect to emerge from these groups?

Sénéchal: The AML task force is currently working on a paper on sanctions clauses. The use of clauses related to sanctions has become a problematic issue for banks involved in international trade transactions and particularly letters of credit. Sanctions are imposed by the United Nations and various countries. They seek to achieve political and economic ends by using trade as a means of foreign policy. Sanctions may prohibit dealings with specific countries, persons, or goods especially with respect to import and export licensing of technology or controlled goods.

Regarding forfaiting, at the ICC Banking Commission meeting of 25 October 2007, a Task Force on Forfaiting was created in order to analyze and give feedback on the International Forfaiting Association's (IFA) Forfaiting Primary Market Guide. After a number of discussions, both ICC and IFA have proposed to work together with the objective to develop a set of global rules for the forfaiting market (both at primary and secondary levels).

For the sanction clause paper, we are working on a fast-track basis, and the report is likely to be issued in September of this year. The forfaiting rules will follow the standard ICC drafting procedure, with a target 0f 2011.

DCI: This seems like a full plate of projects. Will the Commission still be able to focus on its core work with the UCP, the ISBP and the URDG?

Sénéchal: Yes, as you say these are our core projects, and we will not neglect them. The revision of the URDG guarantee rules is coming along well, and we're hopeful it will be completed before long. We're also looking at seeking the Commission's approval to commence a full revision of the ISBP in 2010. The last publication, which became effective in 2007, was more of a technical update to bring the language and content in line with UCP 600.

But this will be a complete revision with the aim to cover documents and subjects not included in the previous publications.

DCI: More than 300 people attended the last Banking Commission meeting in Dubai. While this indicates the Commission's success in attracting members, it could also cause problems if the Commission becomes too large to allow a free interchange of ideas. Do you have any plans to limit attendance at future meetings?

Sénéchal: It is important to focus on quality and not quantity. We are resisting the trend for organizations hosting our meetings to have large number of delegates attending these meetings. Above 300 delegates, it becomes too difficult to have a good discussion of our projects.

That said, we will remain an international Commission. We have our next meeting in Brussels in November 2009; then in 2010 we will meet in Beijing, China, and in Orlando, Florida.

Thierry Sénéchal's e-mail is tsl@iccwbo.org