US banking regulators have proposed maintaining the current capital treatment of key trade finance products as part of the country’s adoption of the latest tranche of Basel reforms.
If the proposals unveiled on March 19 are implemented, trade-related contingent instruments with a maturity of one year or less will retain a 20% credit conversion factor (CCF), which denotes how much capital must be held against a given exposure.
Transaction-related contingent items with a maturity of more than one year, such as performance standby letters of credit, performance bonds and bid bonds, will retain a CCF of 50%.
Across the entire reform package, the capital burden of the biggest US lenders such as Bank of America, Citi, JP Morgan and Wells Fargo will be cut by around 4.8%, the Federal Reserve said. Capital requirements for smaller banks with less than US$100bn in assets will be trimmed by 7.8%.
Banks and other interested parties have until mid-June to respond to the proposal.
Industry associations cautiously welcomed the plans, which represents a drastic shift from the US’ first attempt to adopt the final package of Basel reforms in 2023. That approach envisaged much tougher capital rules and triggered a fierce backlash from lenders.
“From an overall perspective, we are glad to see that these proposed capital charges are more calibrated in respect to risk,” said Tod Burwell, president of the Bankers’ Association for Finance and Trade (Baft). “We will continue to review this in more detail to understand the implications for trade finance and the response to previous concerns raised, and will provide comments accordingly.”
Under the US plans, the country’s banks will continue to be required to allocate more capital to longer-tenor trade finance products than their EU and UK rivals.
In the UK, off-balance sheet trade finance products have a CCF of 20% regardless of maturity. In the EU, the European Banking Authority deems trade finance products to “generally” have a maturity of less than one year, however market sources have previously told GTR that most banks interpret this as allowing a 20% CCF to instruments with longer tenors.
The reform package in the US does not include acknowledgement of credit insurance as a credit risk mitigation technique for banks, which is the subject of lobbying by insurers and major banks.
The consultation, however, asks for comment on alternative approaches to credit substitution, whereby banks can substitute the risk of one counterparty with that of another entity. The use of this approach has helped fuel the growth of credit insurance in markets such as the UK and Europe.
The Fed’s vice-chair for supervision, Michelle Bowman, said the Basel implementation plan “makes targeted, reasonable changes to better calibrate requirements based on risk. These changes will continue to promote safety and soundness and US financial stability.”
“Modernising the US bank capital framework supports consumers, job creators and communities across the country,” four industry groups, including the American Bankers Association, said in a statement.
“[The] proposal marks an important step forward. We welcome regulators’ efforts to enable banks of all sizes to make more loans to American businesses and households, fuelling economic growth while maintaining resilience in the banking system.”
The plans were criticised by Bowman’s predecessor Michael Barr, who led the 2023 push for higher capital charges. He labelled the mooted softening of capital rules “unnecessary and unwise”.
“Today’s proposals, if adopted, would harm the resilience of banks and the US financial system,” Barr, who remains on the Fed board, said in a statement.