Basel III Expected to Boost Trade Finance Costs in Europe

Large companies in Europe seen shifting some trade finance business to global banks.

Basel III regulations on bank capital are expected to increase the prices for trade finance in Europe. A survey by Greenwich Associates shows 80% of large European companies and 90% of companies in the FT 500 index expect prices for trade finance products and services to increase as a result of Basel III.

Greenwich says companies are also concerned about the availability of trade finance going forward in light of Basel III’s impact on banks’ capital and funding.

Dr. Tobias Miarka, a Greenwich consultant, notes that the discussion about the consequences of Basel III “seems to be much more lively and top of mind in Europe than it is in the U.S.” The regulatory changes will “affect everybody, it just doesn’t seem to be on the radar as much in the U.S.,” Miarka adds.

The Greenwich survey also points to a shift in the type of bank that European companies turn to for trade finance. Traditionally, European corporates preferred to get trade finance services from strong regional banks rather than global financial institutions, but there are signs that may be changing. Greenwich’s survey of 300 finance officers at large companies and financial institutions in Europe shows about a third of companies say they plan to do more trade finance business with Europe’s five biggest banks.

Miarka says companies’ interest in doing more trade finance with global banks is part of a broader trend toward concentrating their business with fewer banks and also reflects the fact that working capital may be managed more effectively if the company uses the same bank for trade finance, cash management and FX management.

“For many companies right now, to effectively manage their working capital is key,” he says. “They want to avoid loans as much as possible. At the same time, if you have excess cash, you don’t get a lot of interest on that.”

“That doesn’t mean that large international banks have, by definition, an advantage,” Miarka adds, noting that some regional banks over time have built up global capabilities that work well for their local clients. “It is really about the level of service and understanding of the client.” Many times the local provider might have a better understanding of the particular needs, always provided that they can deliver on an international level.

Miarka says the Greenwich survey shows that Asian companies are much more likely to use trade finance as a means of finance because access to loans and other types of financing are much more limited in Asia. In the U.S. and Europe, trade finance is more of a risk-management tool, he says, that companies use to mitigate both individual counterparty risk and sovereign risk, as well as pursue improvements in working capital management.


See Greenwich’s press release on the survey here.




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