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Dodd-Frank Implementation Could Conflict with Basel III, Other International Regulations

A lot has been said about the Dodd-Frank bill, more completely referred to as the Dodd-Frank Wall Street Reform and Consumer Protection Act. But for a bill that seemed to react directly to an already-devastating financial crisis, few people have described it as “ahead of its time.”

In terms of international regulatory trends, however, that’s exactly what Dodd-Frank has turned out to be, according to Lael Brainard, undersecretary for international affairs at the U.S. Treasury. “By moving forward with this framework we really set the terms for the international debate and were able to move other countries to our framework,” she noted in a recent hearing on the international implications of the Dodd-Frank Act’s implementation. Brainard said that enacting the sweeping reforms included in the bill allowed the U.S. to influence related efforts conducted by authorities in other countries. Had the bill not been enacted when it was, “we would’ve been reacting,” she noted, adding that as implementation progresses, the U.S. is “elevating the world’s standards to our own.”

Conflicts have arisen across borders, however, and at the same hearing, titled “International Harmonization of Wall Street Reform: Orderly Liquidation, Derivatives and the Volcker Rule,” conducted this morning in the Senate Committee on Banking, Housing and Urban Affairs, one notable divergence between U.S. and international regulation could ensnare the world of trade finance.

In his testimony, acting head of the Office of the Comptroller of the Currency (OCC) John Walsh noted that Dodd-Frank requires federal agencies to rely less heavily on credit ratings as a measure of creditworthiness. In fact, it practically requires them not to rely on ratings at all. “Section 939(a) of the Dodd-Frank Act…requires all federal agencies to remove references to credit, and requirements of reliance on, credit ratings from their regulations and to replace them with appropriate alternatives for evaluating creditworthiness,” said Walsh.

On the other hand, the latest edition of the Basel capital requirements, Basel III, makes no such change. “Basel III, in contrast, continues to rely on credit ratings in many areas, making it difficult to implement those provisions domestically.”

Basel III already poses a threat to the world of trade finance by increasing the risk rating of these sorts of transactions, and ultimately making them more expensive for banks. As discussed in an article in the January 2012 edition of Business Credit magazine, the framework could lead banks to abandon the trade finance market altogether. Dodd-Frank’s requirements could increase the severity of this trade finance exodus, especially domestically, by making risk measurements harder to align with both the new U.S. regulations, and Basel III’s international counterparts. “The cumulative implementation will be challenging, particularly for community banks,” he noted.

For more information on global regulatory issues in banking and trade finance, be sure to check out FCIB’s International Credit Executives (I.C.E.) conference, which will feature a keynote presentation by Bart Chilton, commissioner of the U.S. Commodity Futures Trading Commission (CFTC). To find out more, or to register, click here.

Jacob Barron, CICP, NACM staff writer