Basel III rules could spell potholes, literally
Posted by Admin on April 24, 2011
By Greg Roumeliotis, European Infrastructure Correspondent
AMSTERDAM (Reuters) – Rules designed to spare the world’s taxpayers from paying for a future financial crisis could also make it more difficult to build and replace infrastructure such as the roads they drive on.
The rules, known as Basel III, will weigh on the ability of banks to provide project finance loans on which cash-strapped governments and developers of power plants, pipelines and renewable energy such as wind farms rely to fund schemes.
“Banks have been the stalwart of privately financed projects. If long-term lending requires more capital to back it, it affects the enthusiasm of banks to provide it,” said Andrew Davison, senior vice president at credit rating agency Moody’s.
In Europe, this will hamper efforts to attract private funds into transport, energy and communication networks that are key to economic growth as well as providing jobs at a time when many European countries are struggling with unemployment.
Construction accounts for 7.1 percent of Europe`s total employment, according to the European Construction Industry Federation. The European Union (EU) says Europe’s infrastructure investment needs to 2020 could be up to 2 trillion euros.
Project finance loans are also big business for banks, having grown from a $110.8 billion global industry in 2000 to $208.1 billion in 2010, according to data compiled by Thomson Reuters Project Finance International.
This rise, driven by the private sector’s increasing participation in the funding of infrastructure, is at risk under Basel III, which will make project finance loans scarcer and more expensive due to the way they are accounted for.
“There is an expectation that the volume of project finance loans will drop very significantly over the coming years under Basel III,” said Timothy Stone, chairman of the global infrastructure and projects group at accounting firm KPMG.
Under Basel III, a short-term liquidity buffer, known as the liquidity coverage ratio, will include liquid forms of debt such as government bonds and top-notch corporate paper, but not project finance loans, seen as among the most illiquid.
A second ratio, the net stable funding ratio, makes the provision of long-term debt such as project finance more expensive for banks by requiring them to match their liabilities with their assets in terms of funding.
While not all banks will abandon project finance as a result, their business will be severely affected, said Noburu Kato, EMEA head of structured finance at Sumitomo Mitsui Banking Corporation.
“I believe project finance by banks will continue because there is an increasing need for it, from governments that need to invest in infrastructure and companies that do not want to use their balance sheet. But costs will increase,” Kato said.
Although Basel III is to be implemented between 2013 and 2018, bankers say the impact on project finance will be felt before the rules kick in as banks compete to show investors they are well positioned for the new capital requirements.
“I would expect most of the impact of Basel III on project finance to be priced in by 2014,” said KPMG’s Stone.
In the European Union (EU), project finance accounts for slightly less than ten percent of total infrastructure finance, according to a 2010 European Investment Bank study. The European Commission is exploring initiatives such as backing project bonds to compensate for any drop in project finance loans.
Bonds made up only 9 percent of global project finance activity in 2010 according to Project Finance International. The market for project bonds suffered after the woes of monolines — companies that insure bonds — in the credit crisis of 2007.
But some financiers see opportunities to create new instruments to replace the monolines that can lift a project bond’s credit rating from the BBB range into the A category, attracting a wide poll of institutional investors.
Such a market is still in its infancy but has the potential to fill the gap left by the Basel III-hit project finance industry, its advocates say. Last year, British insurer Aviva partnered with Hadrian’s Wall Capital, an advisory firm, to create a debt fund dedicated to such instruments.
“Our form of credit enhancement can help the project finance bond market take off. We are looking to raise approximately 1 billion pounds with our fund and with that we should be able to provide around 10 billion pounds in financing,” said Hadrian’s Wall Capital Chief Executive Marc Bajer.
(Editing by David Cowell)
Basel II requirements and their strict compliance has protected the major banks and financial institutions worldwide.International Bank for Settlement (IBS) is doing a remarkablec job by way of stipulating the necessary capital requirements ina very prudent manner.The developing countries ,in the initial years might have faced the difficulties in its implementation but results are praiseworthy. The stringent measures must go on and Basel III is a welcome step.
Infrastructure projects and other long term investments would require higher capital requirements but for maintaining the robust health of the banks it is needed.The Central banking system of each country would take necessary steps to augument their caital is these activities have to be pushed in a big way.Not only this, there is a long time gap in implementation and during this period, each institution is needed to take strong steps to boost their capital needs to cater the needs of these sectors.As such, there should be any apprehension that development process would suffer dur to Basel III.Robustness of the financial institutions is to be maintained.
In India, the regulatory framework is so strong which has given a big support to the banks in comliance matters, governance and reporting system.The RBI has shown the path to other countries,Regulatory bodies and central banks that how to grow even in difficult times alongwith maintaining strong standards of compliance.
- European Stress Tests to Examine Banks’ Readiness for Basel III (businessweek.com)
- Don’t listen to the banks’ lobbyists – Basel III is way too soft (olafstorbeck.com)
- Goldman Sachs Q1: What’s the real excess? (businessinsider.com)
- Is Financial Reform Working, or Will It Make Things Worse? (businessinsider.com)
- Citi’s Basel-dodging, capital-avoiding, accounting switch (ftalphaville.ft.com)
- Commerzbank, Intesa Seek 13.25 Billion Euros as Basel Rules Loom (businessweek.com)
- Could Goldman Sachs Fail? (baselinescenario.com)
- Economix: Is Goldman Sachs Too Big to Fail? (economix.blogs.nytimes.com)
- Q&A: What EU banks must do to pass the stress test (reuters.com)
- Consensus on Financial Re-Regulation (radcontra.wordpress.com)
- Swiss move to curb implied big-bank guarantee (marketwatch.com)
Sorry, the comment form is closed at this time.