July 3, 2013
The Federal Reserve Board voted on July 2 to implement the Basel III capital requirements in the U.S., establishing more stringent capital buffers to cushion banks against future financial crises. The Board also approved measures to minimize the regulatory burden on smaller, less-complex financial institutions, many of whom already hold capital great enough to comply with the Basel framework.
Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. As suggested by the Basel III framework, the rule institutes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%, and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets. Taken together, under the new rule banks will have to maintain capital to absorb losses equal to at least 7% of their risk-weighted assets.
The rule also includes a minimum leverage ratio of 4% for all banking organizations. The largest, most internationally active banks will have to comply with a new minimum supplementary leverage ratio that includes off-balance sheet exposures. These leverage ratios are important due to the fact that they are, by and large, not risk-weighted and cover trade finance transactions, despite the fact that such activity is often self-liquidating and is historically conducted with a strikingly low risk of default.
Ahead of the Fed's vote, several commenters suggested that the Fed use a smaller credit conversion factor (CCF) when calculating the value of trade finance exposures, but the Fed rejected the argument. "The commenters' proposed modifications to credit conversion factors for trade finance transactions would be inconsistent with the purpose of the supplementary leverage ratioâ€”to capture all off-balance sheet exposures of banking organizations in a primarily non-risk-based manner," said the Board.
As such, banks must apply a 20% CCF to trade financing transactions that (a) aren't unconditionally cancelable by the bank; (b) have a tenor of one year or less; and (c) are self-liquidating, trade-related contingent items that arise from the movement of goods. "The final rule also requires a banking organization to apply a 50% CCF to commitments with an original maturity of more than one year that are not unconditionally cancelable by the banking organization, and to transaction-related contingent items, including performance bonds, bid bonds, warranties and performance standby letters of credit," said the Board.
Essentially, higher CCFs that aren't risk-weighted make these types of transactions more expensive for banks to carry on their books. Though the Fed's plan takes a big step toward ensuring banks are strong enough for the next financial crisis, the risk for trade lies in whether banks will remain interested in financing these transactions. An exodus of banks from the trade financing business could have significant ramifications for exporting.
- Jacob Barron, CICP, NACM staff writer
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A number of changes regarding Uniform Commercial Code Article 9 went into effect on July 1 in the vast majority of U.S. states. Both Wanda Borges, Esq., member of Borges & Associates, and Greg Powelson, director of NACM's Secured Transaction Services (STS), noted that they are significant and warrant attention.
First proposed in 2010, the changes adopted by 37 states and the District of Columbia were crafted to clarify vague UCC mandates. Powelson noted the changes should provide better protection to creditors who choose to use UCC filings to become secured creditors, while also streamlining the process of perfecting a UCC-1 filing.
One of the most significant clarifications pertains to how debtor names appear on UCC financing statements. Borges, while speaking at NACM's Graduate School of Credit and Financial Management last month, reiterated the importance of being exact about the details of a debtor's name. She warned that even a small inaccuracy, such as using a widely known nickname, might result in a creditor's loss of priority. The related amendment offers two alternatives: either provide a debtor's name as it appears on the debtor's unexpired driver's license or, as noted in the existing UCC mandate, use the debtor's "individual," birth-given name.
Other amendments to UCC-9 include the following:
- After-Acquired Property: Perfected security interests in after-acquired property arising within four months after a debtor relocates or assumes collateral will remain perfected as long as a filing is made in the debtor's new jurisdiction within the four months.
- Information Statements: Secured parties now have the right to file an "information statement" if they believe a filing (termination statement, etc.) has been wrongfully submitted. This notifies third parties of a dispute.
- Technical Amendments: Regarding financing statements, some information will no longer be required. This includes type of organization, jurisdiction of organization and organizational identification number of the debtor.
Powelson noted that most states will accept financing statements using pre-amendment rules through the end of July (Wyoming will renew financial statements on a 10-year, rather than 5-year cycle), and that Alabama, Oklahoma and Vermont will not be adopting the Article 9 amendments in 2013. Adoption remains pending in Alaska, Arizona, California, Maine, Massachusetts, Missouri, New Jersey, New York, Pennsylvania and South Carolina. As previously noted, the amendments went into effect in all other states on July 1.
- Brian Shappell, CBA, CICP, NACM staff writer
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The Obama Administration suspended the eligibility of Bangladesh for tariff benefits under the Generalized System of Preferences (GSP) last week. The White House also added Ecuador's name to a lengthening list of countries whose eligibility for benefits under the comprehensive GSP program, which provides duty-free treatment to 5,000 products from 127 developing countries, is under review.
Both actions provide two very different examples of how political and social matters only tangentially related to trade can have ramifications on imports and exports. For Bangladesh, its suspension from the GSP program comes in the wake of two horrific tragedies that could easily have been prevented had Bangladesh been more vigilant in guaranteeing workers' rights and workplace safety. First, in November 2012, a fire in the Tazreen Fashion factory outside of Dhaka killed 117 and injured at least 200, making it the deadliest factory fire in the nation's history. More recently, in April, Bangladesh was the site of the deadliest accidental structural collapse in modern history when the eight-floor Rana Plaza collapsed in Savar, killing an astounding 1,127 people, many of whom were forced to return to work at an illegally-constructed factory despite cracks appearing in the building the day before it collapsed.
U.S. Trade Representative Michael Froman was unequivocal in noting that these events were the reason for Bangladesh's suspension, euphemistically referring to their worker rights and workplace safety standards as having "serious shortcomings." "The Administration is also initiating new discussions with the government of Bangladesh regarding steps to improve the worker rights environment in Bangladesh so that GSP benefits can be restored and tragedies like the Rana Plaza building collapse and Tazreen Fashion factory fire can be prevented," he added. "The Obama Administration is committed to reflecting American values in our trade policy, including with regard to the rights of workers worldwide."
Ecuador, on the other hand, has most recently been in the news for flirting with the idea of granting asylum to National Security Agency (NSA) leaker Edward Snowden. Ecuador has looked less and less likely to grant Snowden the courtesy, but that hasn't stopped the U.S. from placing the South American nation under GSP review as a minor form of punishment. Some other trade-minded lawmakers are also urging the Obama Administration not to renew Ecuador's access to the Andean Trade Preference Act (ATPA) either, which is a boutique system of trade preferences applying only to Bolivia, Colombia, Ecuador and Peru.
"For many reasons I have grave misgivings about renewing the Andean Trade Preference Act for Ecuador," said Sen. Orrin Hatch (R-UT), ranking member of the Senate Finance Committee. "Ecuador has repeatedly violated its international trade commitments and continues to show a disregard for the rule of law."
Congress created the GSP program in the Trade Act of 1974 to help developing countries expand their economies through duty-free exports to the U.S.
- Jacob Barron, CICP, NACM staff writer
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Among NACM's most time-honored traditions, June again marked the graduation of one class of students plus the arrival of the incoming class at the Graduate School of Credit and Financial Management (GSCFM) held at Dartmouth College.
The program, which runs for nearly two weeks spread over two consecutive years, graduated a total of 11 credit professionals last week, 10 of whom took the CCE certification exam, after a steady course load on topics such as advanced financial statement analysis and legal compliance. The other 14 new students completed the first of their two-year program.
Second-year students, as is traditional, also voted for the 2013 GSCFM Student Leadership Award, naming NACM-Tampa's own Doug Faust, CCE as the honored recipient. Faust, who follows the 2012 winner Denise Moller, CCE, ICCE, will be honored at NACM's Credit Congress in Orlando next June.
Several graduating students recalled their experiences and noted common themes: that the education was top notch, as expected, and they were also pleased and surprised by the level of camaraderie among the class.
"In a nutshell, the program is an awesome experience," said Michelle Sparks, of Allied Building Products Corp. in Holt, MI. "It's a very enriching experience for the education as well as the close friendships that are built during the program. I wish we had even more time."
- Brian Shappell, CBA, CICP, NACM staff writer
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