The proposed Basel IV standard on capital reserves is intended to mitigate against the risk of financial crisis but FIEC fears that it poses a threat to infrastructure financing.
In a letter addressed yesterday to European Commission president Jean-Claude Juncker, FIEC President Jean-Louis Marchand warned that the ongoing Basel IV negotiations might have a serious negative impact on the financing by banks of European infrastructure and real estate assets.
“To be blunt”, said Marchand, “this means that 50% of the projects in the pipeline would never start and that the rest would be financed at much higher rates.”
FIEC urges the European Commission to oppose the Basel Committee, in order to protect long-term financing of infrastructure and real estate projects by banks. “We understand that the draft proposals of the Basel Committee on the revision of the standardised approach for credit risk would basically double capital requirements for bank lending to infrastructure projects,” Marchand said in the letter. “This goes against the Investment Plan for Europe’s principle of private long-term investment.”
Projects would be put at risk, or financed at much higher rates. “At the same time, large construction companies would choose external growth strategies rather than project financing. Considering that the vast majority of the sector is composed of SMEs, most of them working on a regular basis as subcontractors on big projects, the whole profession would be negatively impacted.”
Marchand advocates that the European Commission should request the Basel Committee to adjust its rules in proportion to the scale of the risks of the banks’ exposure to these asset classes. He also says that a decision on transposing the final recommendations in the EU should depend on the outcome of the negotiations.