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The Basel III proposals signify a global regulatory shift for banks, focusing on increased capital requirements and refined risk weight calculations.

In the US, this implementation is called the ‘Basel endgame,’ while the UK refers to it as Basel 3.1 and the EU calls it Finalised Basel III.

This term has drawn significant attention from US federal banking agencies under a ‘Notice of Proposed Rulemaking’ (NPR). 

The regulators have invited public comments, and the credit insurance industry has engaged actively to advocate for meaningful Risk-Weighted Assets (RWA) relief.

Trade Finance Global (TFG) spoke to industry leaders Sian Aspinall, Marilyn Blattner-Hoyle, Tod Burwell, Neal Harm, Scott Ettien, Tomasch Kubiak, Azi Larsen, Harpreet Mann, Jean Maurice-Elkouby, Hernan Mayol, Marcus Miller, Richard Wulff, looking at the implications of Basel III implementation in the US, and what this means for the trade finance and credit insurance sector.

The history context of Basel regulations

The Basel Committee on Banking Supervision established Basel regulations in response to financial turmoil in the late 1970s.

Basel I (1988) focused on credit risk, Basel II (2004) included operational and market risks, and Basel III (post-2008 crisis) aimed to strengthen bank capital requirements and improve risk management.

The 2008 financial crisis revealed significant shortcomings in Basel II, leading to Basel III, which introduced more stringent capital requirements, new risk weight calculations, and a revised leverage ratio framework.


Basel III’s nuanced implementation

Each market tailors the Basel III implementation to its specific regulatory environment. 

The US calls it the ‘Basel endgame,’ the UK refers to it as Basel 3.1, and the EU calls it Finalised Basel III. 

Implementation has been pushed back to 1 January 2025 for the EU, and 1 July 2025 for the UK and US. Canada and Australia have already adopted Basel III.

The Basel endgame focuses on increasing capital against credit, market, and operational risks, significantly impacting lending costs and availability.

While the Standardised approach does not allow modelling, Advanced Internal Ratings-Based (A-IRB) banks previously modelled probabilities and loss given defaults (LGDs). 

Basel III removes this flexibility by setting input floors (LGDs at 40% for corporates and 45% for financial institutions) and an output floor (capital requirements cannot be less than 72.5% of the Standardised equivalent).

Basel III – The current US vs EU regulatory comparisons (like for like)

AspectUS regulations (Basel endgame)EU regulations (Basel III)
Capital RequirementsHigher, strict leverage ratiosMore flexible, lower capital charges
Risk Weight CalculationsStringent, detailed standardised approachMore flexible, less stringent
Credit Conversion Factors50% for performance guarantees, higher20% for performance guarantees, lower
Recognition of Credit InsuranceLimited recognition, non-favourable treatmentRecognised as a risk mitigation tool
Leverage RatioNon-risk-based, acts as a backstopFlexible, not binding

Key regulatory changes and what this means for the US

The Basel III endgame increases capital requirements against credit, market, and operational risks in the US. 

It introduces a dual structure for the calculation of Risk-Weighted Assets (RWAs) for banking organisations with total assets of $100 billion or more, including the legacy standardised approach and a new expanded risk-based approach.

Unlike the EU and UK, the US approach to recognising credit insurance for credit risk mitigation has led to varying interpretations and oversight. 

Credit insurance can meet the operational requirements set out in Regulation Q for eligible guarantees. 

However, the vagueness of Regulation Q has resulted in different interpretations by banks and insurers, leading to varied practices in the market. 

This ambiguity has been a focal point in advocacy efforts, emphasising the need for clearer policy guidelines to ensure credit insurance is appropriately recognised and utilised as a risk mitigation tool.

Industry reaction

Industry reactions are varied.

US banks argue that increased capital requirements are impacting their competitiveness compared to EU banks, as it costs them more, which is not the intent of Basel.

Insurers see this as an opportunity to provide greater support to US banks, similar to what they offer in the UK and EU, helping to diversify carriers’ portfolios.

There is currently a lack of clear recognition of credit insurance for credit risk mitigation in the US, partly because most insurance companies providing credit insurance do not qualify as eligible guarantors.

This could present an opportunity for US regulators to level the playing field by recognising credit insurance, potentially encouraging its greater use as a risk mitigation tool. 

Advocacy efforts have highlighted how credit insurance works, the transfer of risk from banks to insurers, and the benefits of spreading risk across insurers and reinsurers.

This diversification of risk is a key advantage, providing a more stable and resilient financial system.

Many have associations advocated US regulators through associations like BAFT (Bankers Association for Finance and Trade), the International Trade & Forfaiting Association (ITFA), International Association of Credit Portfolio Managers (IACPM), and Reinsurance Association of America (RAA).

Marsh McLennan companies (MMC), including Marsh, Oliver Wyman, and Guy Carpenter, have also independently advocated for regulatory changes.

They believe credit insurance should qualify as an eligible guarantee and insurance companies as eligible guarantors. MMC is seeking clarifications that would allow insurance companies without debt securities to qualify based on their parent companies’ status. 

Additionally, they request confirmation that credit insurance policies be classified as corporate exposures with a 65% risk weight, instead of the current 100%.

BAFT (Bankers Association for Finance and Trade) has raised concerns about increased capital requirements driving up the cost of trade finance and reducing its availability. 

They argue that the proposed 50% credit conversion factor for performance guarantees and standby letters of credit overestimates the risk compared to the EU’s 20%, disadvantaging US banks.

The International Chamber of Commerce (ICC) has also advocated for the 20% CCF in the EU, supported by data from the ICC-GCD 2022 study, which showed even lower CCF requirements for performance guarantees.

The proposed guidelines under the Basel III endgame suggest a 50% Credit Conversion Factor (CCF) for performance guarantees and standby letters of credit (SBLCs), while industry associations are advocating for a reduction to 20%, aligning with EU standards. 

The guidelines also propose a lower risk weight of 20% for trade-related exposures with maturities of three months or less, compared to recommendations in other jurisdictions for tenors of six months or less. 

Associations like ITFA and IACPM are advocating for insurance companies to be treated as banks, potentially attracting lower risk weights for self-liquidating trade finance instruments. 

Richard Wulff, Executive Director of ICISA said, “At a time of economic difficulty, unlocking bank financing to the real economy is an important policy question governments must address. Recognising the protection that highly-capitalised and well-regulated insurers deliver to banks for precisely this purpose could be an easy win, benefiting businesses around the world in the long run.”

Marilyn Blattner-Hoyle, Global Head of Trade Finance, Trade Credit & Working Capital Solutions at Swiss Re Corporate Solutions, and Vice Chair of the ICC Banking Commission, said, “US regulators have a win-win opportunity here to further the Basel financial stability aims with a proven ecosystem – the insurance and bank partnership in the credit space. This ecosystem has the potential to create trade and help companies. We are convinced that the insurance industry will continue to be a safe and diversifying risk partner.”

They argue that the rules fail to acknowledge the valuable protection credit insurance provides to banks in reducing and diversifying their credit risk. The silence on this subject in the Basel standards is in part due to this relationship between banks and insurers developing as market practice in the period since the standards first emerged.

In the EU and UK regulators are also examining the use of credit insurance in this way and assessing how best to incorporate eligibility of this kind of protection in the versions of the Basel standards. This would include both the criteria for utilising credit insurance in this way, as well as key metrics such as the loss-given default to apply to an insurance policy used in this way. 

Assuming the EU and UK adopt an approach that enables banks to continue to benefit from credit insurance post-Basel implementation, the US could miss out by not adopting a similar approach. 

In fact, as the product is not as well established on that side of the Atlantic, there is huge potential for banks to begin using credit insurance and other unfunded credit risk transfer solutions to boost bank financing by giving proper recognition in the regulation.

Risk and limitations

Credit insurance as a risk mitigation tool

The ITFA-IACPM whitepaper provides a comprehensive analysis of credit insurance as a risk mitigation tool. 

Credit insurance protects policyholders from non-payment or delayed payment by debtors, due to individual financial issues or external events like political incidents, catastrophes, or macroeconomic problems.

The credit insurance market provides various credit risk transfer products tailored to different asset classes, all meeting regulatory eligibility criteria.

Key products include Non-Payment Insurance (NPI) for lending books, Trade Credit Insurance (TCI) for receivables and supply chain finance, and Surety Master Risk Participation Agreements (MRPAs) for unfunded guarantee business.

Historically, credit insurance was not explicitly recognised as a credit risk mitigant in Basel regulations. 

However, Article 506, introduced in October 2022, marks a breakthrough by recognising it as a distinct risk mitigant in the EU. 

The UK had already taken similar steps with a policy statement in 2018, explicitly recognising the role of credit insurance.

The private credit insurance market has grown significantly over the past 20 years, with around 60 insurers holding investment-grade ratings. 

Banks use credit insurance as a portfolio management tool, with over a hundred billion dollars of coverage globally. 

A 2020 survey by ITFA and IACPM found that $135 billion of credit insurance coverage facilitated $346 billion in loans to the real economy.

For example, the white paper notes that credit insurance can significantly reduce banks’ risk exposure, allowing them to lend more confidently and at lower rates. 

This is particularly important in sectors with higher default risks, where traditional lending might be prohibitively expensive.

The paper includes data demonstrating the reliability of credit insurance policies. 

Between 2007 and 2020, 97.73% of the value of all claims was paid in full, showing the robustness of these policies even during financial crises.

One white paper anecdote illustrates these regulatory differences’ practical impact. 

A major US bank, unable to leverage credit insurance due to regulatory restrictions, faced higher capital charges and reduced lending capacity. 

In contrast, a European competitor, benefiting from more flexible regulations, managed to secure a significant trade finance deal by using credit insurance to mitigate risk and lower costs.

In a letter to the three US federal banking agencies on 16 January 2024, Hernan Mayol, Board Member, ITFA, and Som-lok Leung, Executive Director, IACPM said, “The proposed implementation of the Basel Accords should recognise the suitability of credit insurance as an eligible risk mitigant under the capital rules. This will not only advance the goals of the Basel Accords, but also place US banks on equal footing with non-US banks.”

Comparative analysis: US vs Non-US banks

The regulatory differences between US and non-US banks under Basel III create competitive dynamics. 

The Collins Amendment limits US banks’ ability to gain capital relief compared to non-US banks. EU banks benefit from more flexible risk-weighting rules and leverage ratios. 

The Targeted Review of Internal Models (TRIM) in the EU adds capital add-ons for European banks, mitigating the Basel III endgame’s impact. 

In the US, the Federal Reserve’s assessments and stress tests serve as equivalents, but without similar add-ons, US banks face stricter requirements.

Differences in regulatory frameworks between the US and EU may introduce opportunities for regulatory arbitrage, benefiting banks that navigate these discrepancies.

The Basel III endgame presents an opportunity for the US trade finance and credit insurance sector. 

Advocacy efforts have focused on education around how credit insurance benefits real economic growth and trade finance. 

All going well, the transfer of such risk from banks to insurers and reinsurers equates to $250 billion, according to the IACPM and ITFA, potentially occurring within the first three years. 

This high-caliber, low-loss-level business could enhance the stability of insurers’ portfolios. 

However, addressing issues such as the nuclear exclusion clause, which typically excludes coverage for losses due to nuclear incidents, remains a challenge. 

While some flexibility has been achieved, insurers’ current capacity to fully waive this clause is limited, potentially hindering the full implementation of RWA relief.