The capital requirements imposed by Basel

IIIs may further restrict banks ability to

provide Supply Chain Finance and there is a
need for new, non-bank investors to enter the
market

THE IMPACT OF BASEL III

IN SUPPLY CHAIN FINANCE

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INTRODUCTION
New requirements for banks under Basel III
draw the attention of various stakeholders in
Supply Chain Finance. Its not only banks that
are keen to take note of these regulations,
but also clients want to understand the
implications for their Supply Chain Finance
programs. This article gives an overview of the
upcoming Basel III requirements and examines
the implications in terms of market
development and funding spreads.
PrimeRevenue Inc., 2014

What is Supply Chain Finance?

Supply Chain Finance is a solution that helps meet corporate objectives
including: working capital, EBITA, reducing supply chain risks. It allows
corporates to increase their payment terms and/or provide the option to their
suppliers to get paid early.
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The Impact of Basel III

BASEL I AND II
WHATS NEXT?

Supply Chain Finance provides a unique

solution with a win-win proposition for all
the parties involved: buyer, supplier,
funder and service provider. In terms of
capital optimization, the benefits for the
banks are the possibility to reduce the
consumption of risk-weighted assets, as
counterparty risk shifts to larger obligors
(buyers) with better risk profile than the
supplier. This is an important aspect in
light of the Basel III regulations as banks
can increase profitability thanks to lower
capital requirement compared to other
trade finance solutions. However, the
current discussions on Basel III guidelines
might not recognize the short-term, selfliquidating nature of Supply Chain
Finance, which could result in higher
capital costs for banks.

In summary, the higher the risk of a banks

business,
the
higher
the
capital
requirements for the financial institution
and the higher the pricing. For off-balance
sheet commitments such as credit limits in
Supply Chain Finance the capital level
was required to be 20% weighted.
Following the financial crisis, it became
clear that the concept of Basel II also had
shortcomings and that there was a need
for greater change in banking regulation
and supervision. In 2010, the Basel
Committee endorsed a new regulatory
capital and liquidity regime, which resulted
in Basel III. The third round of regulations
will have to be implemented by banks
between 2013 and 2019. The goal of
Basel III is to increase quantity, quality
and transparency of a bank's capital.

The Impact of Basel III in Supply Chain Finance

Comparing with Basel I, the first
regulations were quite discrete when
addressing trade finance in general.
Because the requirements could not
accommodate the evolution of the bank
risks, a new accord, Basel II was
introduced and became effective in 2008.
The goal of Basel II was to apply risk
sensitive capital requirements.

This new framework sets a more

restrictive interpretation in terms of quality
of counterparty risk. Furthermore, Basel III
may require banks active in Supply Chain
Finance to hold five times more capital
than beforefor
to fund
Supply Chain
Finance
differentials
financing
working
transactions.

Credit spread
capital between investment-grade and low rated
companies have widened during the credit crisis and
are likely to increase further under the new Basel
regulations.
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