The Prudential Regulation Authority (PRA) has released its second policy statement on the implementation of Basel 3.1, set to take effect in January 2025. 

This policy introduces significant changes to capital requirements for UK banks, with important implications for trade finance, a vital component of the UK’s international trade ecosystem.

Lowering the credit conversion factor for trade finance

One of the most notable changes is the reduction of the Credit Conversion Factor (CCF) for certain trade finance instruments. 

Based on data from the International Chamber of Commerce (ICC) and Global Credit Data Consortium (GCD), the PRA has assigned a 20% CCF to trade letters of credit and similar instruments. 

This is a reduction from the 50% previously applied under the Capital Requirements Regulation (CRR). 

By lowering the CCF, the PRA has made it easier for banks to provide trade finance products at lower capital costs, benefiting businesses that rely on these services, especially small and medium-sized enterprises (SMEs).

Phil Evans, Executive Director of the PRA, explained that the decision to reduce the Credit Conversion Factor (CCF) was based on empirical evidence showing that these trade finance products pose relatively low risk, even in downturn conditions. 

In his speech, Evans said, “We have sought to balance the need for global credibility with the practical realities of maintaining a competitive and functioning domestic market.” 

By reducing the CCF, the PRA aims to ensure that banks can continue offering trade finance while managing costs, particularly for SMEs that depend on these services.

Balancing global standards with domestic needs

The PRA’s decision to assign a 20% CCF, in tandem with extending this treatment to shipping, customs and tax bonds as they are linked to the movement of goods and services, which is lower than the 50% recommended in the Basel 3.1 framework, is seen as a pragmatic move. 

The PRA took into account the specific characteristics of the UK market, which has a historically low default rate for trade finance. 

This decision is expected to increase the availability of trade finance in the UK and enable banks to support investment in infrastructure and emerging green technologies. 

Lowering capital requirements will ease the burden on banks, enabling them to provide more accessible and affordable trade finance products.

Industry stakeholders have praised the PRA’s approach, highlighting that the decision was well-supported by robust data. 

One expert noted that the PRA “asked the right questions” during its consultation, leading to a technically sound decision to benefit the sector. The move is seen as a win for banks and businesses alike, helping to maintain the UK’s competitive edge in trade finance.

Supporting broader economic sectors

Beyond trade finance, the PRA has introduced measures to support other key sectors such as infrastructure, mortgages, and SMEs. 

Adjustments to capital requirements for infrastructure projects will make it easier for banks to finance large-scale investments. 

Meanwhile, changes in mortgage lending rules are designed to keep housing affordable while safeguarding the stability of the financial system.

For SMEs, the lower capital requirements for trade finance products are particularly significant. 

Trade finance is crucial in enabling SMEs to manage cash flow and risks in international trade. 

The PRA’s decision ensures that these businesses can continue accessing the financial services they need, even in an increasingly regulated environment.

As the UK moves towards the full implementation of Basel 3.1, the focus will be on ensuring that the new framework supports growth while maintaining financial stability. 

Since the 2016 Brexit referendum, the UK’s place in global trade has been unclear – but the dust is settling. The PRA’s balanced approach to regulation allows the trade finance sector to navigate these changes and ensure that the UK remains a key player in global trade.