We’re analysing the effects of regulatory capital charges on greenfield infrastructure financing

Data suggest that financial regulations do not sufficiently incorporate risk sensitivities in the performance of infrastructure as an asset class

The GI Hub began examining the regulatory capital treatment of infrastructure investments in 2019, as part of our initiative to address barriers to the establishment and advancement of infrastructure as an asset class. Essential to this was an examination of infrastructure investment performance, which we now address in detail in our annual flagship Infrastructure Monitor report. But, we also honed in on how regulatory capital treatments affect private financing of infrastructure.

The impacts of regulatory capital reform could be significant, given how much greenfield infrastructure is financed by banks and their instrumental role in structuring greenfield projects

Our preliminary assessment of regulatory capital charges, using aggregated data, suggested that the Basel III regulatory framework requires banks to put aside more capital for infrastructure projects than is warranted by actual infrastructure credit performance. Higher capital requirements force banks to reduce their financing capacity and to increase their loan margins, ultimately pushing prices upwards for infrastructure end users.

Banks usually supply the largest share of financing in the initial phase of an infrastructure project and therefore play a critical role in financing greenfield infrastructure and filling the infrastructure investment gap. According to the GI Hub Infrastructure Monitor, financial services providers, primarily commercial and investment banks, financed 63% of the private investment in infrastructure projects in primary markets in 2020.

In 2020, the European Banking Authority (EBA) introduced the ‘Infrastructure Supporting Factor (ISF)’ for banks that sets qualifying criteria for infrastructure projects that are eligible for a regulatory capital charges discount based on their low risk profile. The ISF also includes an environmental, social, and governance (ESG) component by requiring an environmental impact assessment of the project. EBA’s preliminary analysis suggests that this provision has resulted in capital relief to banks, especially small banks that could not apply their own internal models or obtain credit ratings for precise risk assessment. EBA is currently undertaking a detailed assessment to calibrate precise risk measures and assess the materiality of ISF to infrastructure lending.

Our consultations show a readiness, among stakeholders, to consider reform

Since we started working to advance infrastructure as an asset class through financial regulations, we have consulted with a range of public and private sector stakeholders to gather their expertise, experience, and views on if and how financial regulations could be reformed to strengthen the infrastructure asset class. The discussions have confirmed support for our overall finding that the Basel III regulatory framework requires banks to put aside more capital for infrastructure projects than is warranted and have also:

• Clarified practical nuances in the application of regulatory rules
• Highlighted other regulatory barriers on the pathway towards infrastructure as an asset class.

The GI Hub shared these findings with the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) Secretariat last year. While the information was welcomed, the BCBS Secretariat indicated that disaggregated data on the impact of regulatory capital charges are needed for them to move forward and carry out any analysis.

There is a path forward

We are consolidating the viewpoints of key stakeholders in the public and private sectors, including the largest banks around the world who actively invest in greenfield infrastructure, to arrive at a holistic perspective on the impact of regulatory charges, including all interdependencies of the current and upcoming regulations.

Together with the G20 Presidency, the GI Hub plans on collaborating with the FSB and BCBS Secretariat to evaluate the statistical evidence that supports addressing the regulatory barriers to infrastructure investments. To represent the interests of the banking industry in these discussions, we are conducting a survey and forming a coalition of key stakeholders. If you are involved in these issues within the banking industry and are interested in contributing you input to the survey or joining the coalition, we invite you to register your interest, and a member of our team will contact you.

Our ongoing consultation and work will continue to strengthen the evidence base to break down regulatory barriers and further advance infrastructure as an asset class. This will contribute to our advocacy for recalibrating regulatory capital charges for infrastructure investments.