‘Simplicity and standardisation’ will benefit finance industry, says ICC Banking Commission Chair

Transcript

Regulators are clamping down on financial institutions across Europe, hoping to foster a more harmonised and resilient banking environment. But will their efforts be in vain? One report by the International Chamber of Commerce (ICC) suggests such regulation will impede growth and free trades, stunting the continent’s economic growth. World Finance speaks to Kah Chye Tan, Chair of the ICC Banking Commission, to discuss its findings.

World Finance: Well Mr Tan, how important are the 2014 Trade Register Report findings, and how surprising?

Kah Chye Tan: When we first started, the register was really there to address regulatory capital matters. But increasingly we find that the register is being used as a tool to help alternative investors to invest in a new asset class – in this case, it’s trade finance.

World Finance: So do you think the cacophony of regulations are stunting growth in Europe?

Kah Chye Tan: The jury is still out. There is definitely room for a more reflective, and more accurate, set of regulations to govern trade finance.

The jury is still out. There is definitely room for a more reflective, and more accurate, set of regulations to govern trade finance

I will say that in the last five years we have seen many proactive changes being put in place by the regulators. But like everything else, there is always room for improvement.

World Finance: Well 60 percent of respondents felt the lack of harmonisation of compliance standards created problems. So would you say transparency hinders competition?

Kah Chye Tan: It does. It creates a very uneven form of competition. So from that perspective, yes: it does hinder growth, and actually it can go against the very objective of the regulation, which is to promote recent management.

So giving you a quick example. The regulations have improved such that there is no longer a 365 day floor for letters of credit as a product. But this has not been consistently applied across all trade finance products. And definitely not consistently applied in all countries.

World Finance: So would you say then that there’s a call for regulations to be standardised throughout world markets, to create more of a fair playing field?

Kah Chye Tan: I think the regulators’ job is very tough! On one hand we want simple regulations; on the other hand we want it to be sufficiently granular to differentiate the risk profiles.

I do believe that simplicity and standardisation will benefit the industry as a whole. I think there’s a lot of feelings in the marketplace today, that the regulations today are looking more and more like a black box: it’s difficult for people to understand.

When you have a set of regulations that’s difficult for people to understand, no matter how good the intentions of the regulations, you run the risk of the means and the ends getting mixed up. You know, the bankers chasing after the means, rather than chasing after the ends.

So simplicity is important.

World Finance: Well there’s certainly a feeling that more transparency equates to less profits. So who benefits from more transparency?

Kah Chye Tan: Actually, I think more transparency will promote a more sustainable form of banking in the medium to longer term.

In the shorter term, yes, you know, as with every change it will create some discomfort. And I guess that’s the reason why people tend to think transparency results in lower profit. But that’s a very inappropriate short-term view. In the medium to longer term, the transparency actually builds a much more robust banking environment.

Yes, maybe profit will go down for the banks, but you know what? I think there will be more players, more companies will benefit from it, and it will mean more opportunity for us to finance trade.

[T]he transparency actually builds a much more robust banking environment

World Finance: So the ICC’s report suggests that banks financing trade should be less stringently regulated than other areas of finance. Why is this?

Kah Chye Tan: I wouldn’t say it is less regulated or more regulated; I think it is a different set of regulations that is needed.

There is a general market acceptance – and the data from the trade register further reinforced – that it is a very low risk product.

The loss history can be as low as 0.03 percent. It’s a fraction of AAA corporate bonds’ default rate.

To manage trade finance as part and parcel of the broader corporate range product, we run the risk of the law of average. When you put trade finance with more or less risky products, and you draw an average – say the average AVC, as an example – some products that are higher risk are going to benefit from an average AVC. Some products that are lower risk, as in the case of trade finance, will not benefit from it. In fact, will be disadvantaged by it.

So for that reason, I don’t think it’s a case of whether we are asking for more favourable regulation, or less favourable regulations; we are asking for the right regulations.

World Finance: So trade and export finance is a significantly low risk banking finance technique you said; so where are the high risk areas, and do they give more profits?

Kah Chye Tan: All else being equal, the longer maturity transactions will have a higher risk. All else being equal, a product that is further and further away from the real economy will have a higher risk.

In the case of trade finance and export finance, these are relatively short-term products. These are products that support the real economy.

World Finance: Well I want to take a little look now at the Basel accords; what are the problems would you say, with these?

Kah Chye Tan: What is needed is greater differentiation by the different risk profiles of the different banking products. Credit cards are 30 days, housing loans are 30 years. Trade finance is 90 days. Project finance is 10 years. Trade finance has nothing to do with credit derivatives.

We need to put these various products in their logical buckets, and come out with a logical set of regulations to manage each bucket.

The law of averaging is a case of oversimplification.

World Finance: So finally, what’s the key to driving liquidity in international trade?

Only through an active tripartite dialogue between the regulators, the bankers, and the businesses, will we come out with the right set of regulations

Kah Chye Tan: An activate dialogue between the regulators, the bankers, and businesses – the importers and exporters – is very important.

Only through an active tripartite dialogue between the regulators, the bankers, and the businesses, will we come out with the right set of regulations. Especially in the case of liquidity.

Trade finance is as short as 90 days. The average is 90-100 days. There’s a current set of regulations that requires 50 percent of funding be long-term: to finance short-term 90-100 days trade transactions would be too onerous. And we will end up charging the clients more than what is needed. And that’s the danger that we’re trying to avoid.

World Finance: Mr Tan, thank you.

Kah Chye Tan: Thank you Jenny.