25 November 2020
25 Nov 2020
Should there be a differentiated regulatory capital treatment for infrastructure investments?
Source: Risk Capital Limited drawing upon Moody's Analytics 2020 data and updating the 2018 work of Andy Jobst.
Regulatory capital frameworks require banks and insurers to put aside more capital for infrastructure investments than is warranted by these investments' historical credit performance, according to analysis recently commissioned by the Global Infrastructure Hub. Currently, regulatory authorities do not differentiate infrastructure investments from generic corporate exposures despite the data indicating the latter to carry greater risk.
By applying historical credit performance of infrastructure investments to calibration approach commonly used by regulators, we find that capital charges could be reduced by 60% to 70% for banks and insurers. This is true both for high-income country and middle- and low-income country infrastructure loans.
There are multiple methodologies for calculating regulatory capital charges. The adopted calibration approaches are designed to be as close possible in spirit and approach to those used by the following regulatory authorities: International Association of Insurance Supervisors (IAIS) and European Insurance and Occupational Pensions Authority (EIOPA) for insurers, and Basel Committee on Banking Supervision (BCBS) for banks.
there are multiple methodologies for calculating regulatory capital charges. The data presented here is for the methodologies assessed to be the approach most widely adpoted and/or which best replicate the calibration approaches of regulators:
BCBS. Basel Commitee on Banking Supervision capital charges are based on Basel III Foundational-IRB approach using a 40% LGD and an average of the charge applied to high-income and midddle/low-income countries.
EIOPA. European Insurance and Occupational Pensions Authority captial charges are based on Solvency II. Estimates include an ex-post diversification allowance based on a representative insurer. EIOPA provides for a lower capital charge for qualifying infrastructure investments, which can be thought of as PPPs in OECD or EEA countries with a secured availability payment and which can be held to maturity.