. /.  WORLD TRADE  
ORGANIZATION   
WT/WGTDF/W/60 
28 October 2011 
 (11-5469) 
Working Group on Trade, Debt and Finance  
 
 
 
CHANGES TO THE PRUDENTIAL FRAM EWORK GOVERNING TRADE FINANCE 
 
Information Note by the Secretariat 
 
 
1. On 25 October 2011, the Basel Committee on Banking Supervision (BCBS) announced 
changes to the prudential framework governing trad e finance, in particul ar changes aimed at 
facilitating the financing of trade between low-income  countries and the rest of the world, while not 
jeopardizing the safety and soundness of the financ ial system.  A review of certain regulatory 
provisions governing trade finance had been commissioned by the G-20 Summit in Seoul, in 
particular under Article 41 of the Seoul Summit Document.  The BCBS held several rounds of discussion with the representatives of the WTO, th e World Bank and the International Chamber of 
Commerce.  Progress reports have been provided by the WTO Secretariat to Members through its 
regular reporting of the activities of the Expert Group on Trade Finance.  WTO Documents WT/WGTDF/W/52 and W/59 provided updates on the st ate of discussions and expectations by the 
Secretariat.  This note presents the measures adopted  by the BCBS (section I) and the reactions of the 
Director-General, as expressed in a joint communiqué  with the President of the World Bank, and at 
the General Council on 26 October 2011. 
I. COMMUNIQUE FROM THE BASEL COMMITTEE ON BANKING SUPERVISION  
2. The BCBS has issued the following statement on 25 October 2011: "the Basel Committee on 
Banking Supervision has evaluated the impact of Ba sel II and Basel III on trade finance in the context 
of low income countries.  As a result, it adopted two technical changes to the Basel regulatory capital 
adequacy framework related to the treatment of tr ade finance that will help promote trade with low 
income countries.  The Committee agreed to waive the one-year maturity floor for certain trade 
finance instruments under the advanced internal ratings -based approach (AIRB) for credit risk.  It also 
agreed to waive the so-called sovereign floor for certain trade-finance rela ted claims on banks using 
the standardised approach for credit risk.  Th e Committee conducted its evaluation in consultation 
with the World Bank, the World Trade Organisati on and the International Chamber of Commerce. 
The agreed changes will improve the access to and lo wer the cost of trade finance instruments for low 
income countries".  
3. Further technical details regarding the deci sion of the BCBS can be found by using the 
following link: http://www.bis.org/press/p111025.htm . 
II. VIEWS FROM THE WTO DIRECTOR-GENERAL  
4. In a joint communiqué with the President of the World Bank, issued on 25 October 2011, the 
Director-General of the WTO made the following statement: "We welcome the technical changes to 
the regulatory regime of trade finance a nnounced today by the Basel Committee on Banking 
Supervision.  This is a useful step that will help  promote trade with low in come countries.  We look 
forward to continuing consultati ons with the Committee.  While necessary, the strengthening of 
prudential standards for the financia l industry needs to take account of the low risk nature and the pro WT/WGTDF/W/60 
Page 2 
 
 
  development impact of trade finance.  We are grat eful to the Internationa l Chamber of Commerce for 
its on-going work on trade finance data collection which helps making this case". 
5. In his address to the General Council on 26 Octo ber 2011, the Director-General stated the 
following:  
"In a joint letter that World Bank President Robert Zoellick and I sent to G-20 Leaders in 
Seoul, we raised the issue of the potential uninte nded consequences of the Basel II and III frameworks 
on the availability of trade finance in particular  for low income countries.  While trade finance 
received preferential regulatory treatment under the Basel I framework, in recognition of its safe, mostly short-term character, the implementation of  some provisions of Basel II proved difficult for 
trade.  The application of rules governing risk, in particular the confusion between the country risk 
and the individual traders' risk were not particular ly advantageous for banks willing to finance trade 
transactions with developing countries partners.  Th e Basel III framework added to these requirements 
a 100% tax on letters of credit, through the applica tion of a newly established leverage ratio that was 
more intended to tax toxic derivative products placed  off-the-balance sheet of banks, than to penalize 
secured instruments for financing trade.  These letters of credit are primarily used by developing 
countries – and in almost 100% of trade finance tran sactions in the case of low income countries.  The 
WTO together with the World Bank engaged in a dial ogue with the Basel Committee, with the help of 
the International Chamber of Commerce.  With th e help of the WTO Expert Group on Trade Finance 
we focused on demonstrating that trade finance is one of the safest, if not the safest, form of finance in 
the world; and that it promoted a form of finance that contributed to development through trade.  
The Basel Committee has now taken a number of  these comments on board.  It has agreed 
that 90 to 115-days trade letters of credit will be capit alized for that appropriate maturity.  In addition, 
it has agreed to review the rule under which the ra ting of a banking counterparty in a trade transaction, 
could not be better than the sovereign.  In many low-income countries, the sovereign is either poorly 
rated or unrated, so this was discouraging trade, while traders have good payment records.  For this 
category of countries, the Basel Committee has lifted/ad apted the rule to the reality of international 
trade.  This will certainly give a boost not only to north-south trade, but also trade from emerging 
countries to low income countries, and favour the integration of the later in global supply chain financial arrangements.  This is a very important de velopment which will help trade flow.  It is also a 
concrete example of a successful co-operation betwee n international organisati ons.  We will continue 
our dialogue with the Basel Committee to address what could be the unintended consequences on 
trade of a much needed financial regulation". 
 
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