The Law of Unintended Consequences – example [insert large number here]

I have been following the Basel III regulations for some time. As always with regulation of this breadth & importance, there is lot to discuss but it seems there has been an immediate impact on funding for the “real” economy, i.e., project and trade finance.

As reported in the FT here, many banks under pressure to deleverage have concluded that the demands of Basel III to duration match the liability means that project finance will not produce sufficient return to justify keeping that business. So far Banco Espirito Santo, RBS and Bank of Ireland have sold their project finance businesses and I am sure that more will follow. It remains to be seen whether this consequence will result in a smaller number of banks engaging in project finance and/or project finance moving to non-banks. In addition, as reported here, the tightening availability of project finance is impacting infrastructure projects. Which will clearly have an negative impact on economic growth. At the time when the real economy is needed to grow.

The situation for trade finance is similar but there has been a concerted effort to amend the rules due to the emerging market’s dependence on trade finance as reported here. I hope that this argument prevails – the most recent graph from the IMF shows how much the global economy needs the emerging markets to continue growing.

Note: access to the FT requires registration.

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