Proposed new ”Basel III”- rules threaten export credit guarantees

The plans to renew the Basel -rules governing the solvency and liquidity of banks pose a threat to export credit guarantees systems. The rules are going to be changed by the end of this year, because the previous Basel II -rules did not succeed, for their part, to prevent the severe financial crisis that started in 2008.

“The renewal plans do not take into account the importance of export credit guarantees in foreign trade and the fact that the export credits financed by banks and guaranteed by Export Credit Agencies (ECAs) are risk free as regards credit risk. “In addition, they are relatively liquid assets that the bank can sell from its own balance sheet” says Topi Vesteri, Executive Vice President in charge of export financing at Finnvera plc.

Vesteri chairs the Berne Union Medium and Long Term committee which brings together public/official export guarantee agencies. Many of these agencies have identified the danger ahead. “In case the Basel III Committee’s plans materialize in their current format, the viability of export credit guarantees might collapse. The export credits that at the moment have a zero-risk -weight, would now be put into the same basket with any high-risk loans”, says Vesteri. The reason for this is that the drafters of the proposed rules have strongly addressed the liquidity risks of banks - the balance of the funding and lending sides of the balance sheet is in focus and the mechanisms to transfer credit risks such as export credit guarantees have been forgotten in this round of redrafting the rules.

Now it is the time for export companies, banks and export credit guarantee agencies to make a joint effort to influence the rules. According to the new proposals, the risk weighting of the guarantees provided by agencies such as Finnvera (backed by “AAA” Republic of Finland”) would not be zero when the new ratios for banks will be calculated. In case this happens, banks would be less interested to fund export credits. In practise this would mean that the states would have to fund/ finance export credits directly instead of providing guarantees for banks. The states would need to set up Export Credit Agencies who would act as direct lenders or to create systems to commit to buy credits guaranteed by their respective guarantee agencies from the balance sheets of the banks. Consequently, it would be in the interest of states as well to influence the plans to change the supranational regulation.

“At the end of the day, financing of capital goods exports is such a small portion of the banks’ activities, that it has been easy to ignore it when the main regulation has been considered. However, export financing is vitally important for foreign trade”, says Vesteri.

In 2009 the new export credit guarantee commitments connected to capital goods of the 26 public export guarantee agencies who are members of the Berne Union, the international association of credit and insurance, amounted to USD 200 billion. The new commitments grew 24 % compared to the previous year while the world trade collapsed. “The guarantee agencies kept the world trade going”, says Vesteri. The amount of claims has increased, but stayed moderate in spite of the economic downturn. In 2010, the demand for guarantees has continued to be on a high level. The severe financial crisis started in 2008 and is not over yet, even though there are positive signs of times getting better. “From the point of view of and export credit guarantee agency, it unfortunately seems that the new rules ignoring officially supported export guarantees might slow sown world trade down”.

Further information: Mr Topi Vesteri, Executive Vice President, Finnvera plc. tel. +358 20 460 7238