It may be the case that the post-crisis financial system may not be adequately structured to provide certain types of long-term financing. •  First, longer-term corporate and project finance loans already attract a higher capital charge compared to short term loans. Coupled with the increased overall capital requirements under Basel III, this may create a disincentive for long-term loans. •  Second, to meet liquidity requirements, banks may substitute long-term lending activities with short-term lending. In calculating the Net Stable Funding Ratio, lower weights are assigned to loans with maturities of less than a year. •  Third, Solvency II, which will impose higher risk charges on longer-dated assets, may result in insurers de-risking by taking on shorter-dated assets. •  Fourth, the interaction between central clearing, margining and capital requirements may impact the variety and liquidity of some derivatives such as long-dated interest rate swaps used to hedge risks associated with long-term financing. 6  BIS central bankers’ speeches  There may be scope for some intelligent, risk-sensitive fine-tuning of regulation: •  The design of risk weights for insurers should not penalise them for holding good quality long term assets, if they are matched by long term liabilities. •  The preferential treatment of sovereign debt in bank regulation should be reexamined, so that banks are not disincentivised from holding good quality, long term corporate debt. •  Better calibration of the risk weights for securitisation for banks and insurers may be necessary.

There are concerns that the various regulatory reforms taken together may lead to a pullback in trade finance and long-term investment financing. The global regulatory community and national governments have become increasingly sensitised to these concerns. In the area of trade finance, the Basel Committee consulted the World Bank, the World Trade Organisation, and other relevant bodies. A number of adjustments were made to the capital and liquidity rules to facilitate trade finance. •  In the area of capital rules, the Basel Committee waived the one year maturity floor for certain trade finance instruments under the advanced internal ratings-based approach for credit risk. It also waived the sovereign risk-weight floor for certain trade finance-related claims using the standardised approach for credit risk. •  In the area of liquidity, the Basel Committee issued guidance for national supervisors to apply relatively low run-off rates for trade finance commitments. Preliminary data suggests that the availability and cost of trade finance has not been greatly impacted to-date by the implementation of Basel III. Spreads have normalised post-crisis and pricing appears to be influenced more by broader macro factors and competition. Further, there are many well-capitalised banks, especially in Asia, that are well-placed to operate in the new regulatory regime; and many of them have stepped up. We should continue to monitor closely the impact of regulatory changes on trade finance. Trade is the lifeblood of Asian economies. But we have a bigger challenge in long-term financing, especially for infrastructure.