A new report by Greenwich Associates claims that Basel III bank capital adequacy requirements are poised to increase pricing on trade finance. Greenwich suggests that this could accelerate the development of alternative sources of credit, including trade finance funded by nonbank investors.

The report, entitled 'Global Trade Finance: Basel III Capital Rules Open Doors for Alternative Sources of Funding', documents mounting concerns among companies around the world about the possible impact of Basel III. It says that an increase in trade finance costs would have a particularly large and negative impact in Asia, where companies' reliance on trade finance as a critical source of funding is higher than in developed markets.

Already, European banks that have been major suppliers of trade finance in Asia are pulling back says Greenwich Associates, largely as a result of the new capital rules. Although local Asian banks and Japanese banks are stepping in order to fill that void, conditions appear to be in place for the emergence of alternative sources.

Alternative sources
One of those sources will likely be trade finance funded by non-bank investors, with participation facilitated via institutional funds or structured products. "In the current era of historically low interest rates, investors hungry for sources of attractive returns could be enticed by the incremental yield, low volatility, low duration and diversification benefits of trade finance," said Markus Ohlin, a Greenwich Associates consultant.

Banks and investment management firms have already successfully come to market with a limited number of trade finance vehicles for investors, including structured trade finance vehicles designed to provide the banks with capital relief and investors with attractive returns. Another source of trade finance may be the burgeoning class of institutional trade finance funds.