Coordinating Secured Transactions Law and Capital Requirements

The newly adopted Model Law on Secured Transactions crowns the UNCITRAL's efforts to facilitate access to finance. One of the drivers for reforming secured transactions laws has been the assumption that a modern legal framework allows banks to reduce capital charges, thus lowering the costs of credit. Yet, pursuant to the capital requirements enshrined in the Basel Accords – promulgated by the Basel Committee on Banking Supervision (BCBS) – security rights trigger capital charges below the level of those attributed to unsecured credit only if the soundness of individual banks and the stability of the entire banking system are deemed to be preserved. If this is not the case, banks are required to treat secured credit in the same manner as unsecured credit, frustrating the desired effects of modern secured transactions law reforms. It follows that further cooperation and coordination between UNCITRAL and the BCBS is required to resolve such a critical, and often overlooked, impediment to both domestic and cross-border finance. As a result, we recommend the elaboration of a Guide that national law reformers - and banking regulators - could follow to ensure compliance with both the UNCITRAL Model Law and the Basel Accords