Credit Risk Dynamics of Infrastructure Investment : Considerations for Financial Regulators
Prudential regulation of infrastructure investment plays an important role in creating an enabling environment for mobilizing long-term finance from institutional investors, such as insurance companies, and, thus, gives critical support to sustaina...
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Online Access: | http://documents.worldbank.org/curated/en/606411522326750586/Credit-Risk-Dynamics-of-Infrastructure-Investment-Considerations-for-Financial-Regulators http://hdl.handle.net/10986/29540 |
| Summary: | Prudential regulation of infrastructure
investment plays an important role in creating an enabling
environment for mobilizing long-term finance from
institutional investors, such as insurance companies, and,
thus, gives critical support to sustainable development.
Infrastructure projects are asset-intensive and generate
predictable and stable cash flows over the long term, with
low correlation to other assets; hence they provide a
natural match for insurers' liabilities-driven
investment strategies. The historical default experience of
infrastructure debt suggests a "hump-shaped"
credit risk profile, which converges to investment grade
quality within a few years after financial close --
supported by a consistently high recovery rate with limited
cross-country variation in non-accrual events. However, the
resilient credit performance of infrastructure -- also in
emerging market and developing economies -- is not reflected
in the standardized approaches for credit risk in most
regulatory frameworks. Capital charges would decline
significantly for a differentiated regulatory treatment of
infrastructure debt as a separate asset class. Supplementary
analysis suggests that also banks would benefit from greater
differentiation, but only over shorter risk horizons,
encouraging a more efficient allocation of capital by
shifting the supply of long-term funding to insurers. |
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