The rules of Basel 2 and trade finance Part 2

Andrew Cornford, Observatoire de la Finance, Geneva

As explained in greater detail in the overview of the Annex, Basel 2 contains a number of different options for estimating regulatory capital requirements for credit risk.[1] One of these options is simple and follows lines similar to those contained in the previous Basel Capital Accord of 1988 (Basel 1). The other more advanced options of Basel 2 provide for the setting of capital requirements on the basis of the banks’ own internal estimates of the determinants of credit risk. The latter options appear to be the principal target of the representations concerning the negative impact of Basel 2 on trade finance described in the previous section. (For an overview of Basel 2 see the Annex.) [Part 1 of this article was featured in the March 2010 issue of FRI.]