The Impact of Basel III on Trade Finance: The Potential Unintended Consequences of the Leverage Ratio

17 Pages Posted: 30 Sep 2014

See all articles by Marc Auboin

Marc Auboin

World Trade Organization (WTO)

Isabella Blengini

University of Lausanne

Date Written: September 29, 2014

Abstract

Trade finance, particularly in the form of short-term letters of credit has received favourable capital treatment new Basel III rules. However, concerns have been expressed over the potential negative “unintended consequences” of the newly created leverage ratio for trade. This paper offers a relatively simple model approach showing the conditions under which the 100% leverage tax on assets such as letters of credit would reduce their natural attractiveness relative to higher-risk ones, which stand in the balance sheet of banks. The decision by the Basel Committee in early 2014 weakening the leverage ratio on trade instruments seems to support the analytical framework developed in this paper.

Keywords: trade financing, cooperation with international financial institutions, prudential supervision and trade

JEL Classification: E440, F130, F340, F360, O190, G210, G320

Suggested Citation

Auboin, Marc and Blengini, Isabella, The Impact of Basel III on Trade Finance: The Potential Unintended Consequences of the Leverage Ratio (September 29, 2014). CESifo Working Paper Series No. 4953, Available at SSRN: https://ssrn.com/abstract=2502784

Marc Auboin (Contact Author)

World Trade Organization (WTO) ( email )

Rue de Lausanne 154
Geneva 21, CH-1211
Switzerland

Isabella Blengini

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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