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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Main Author: Jobst, Andreas A.
Format: Working Paper
Language:English
Published: World Bank, Washington, DC 2018
Subjects:
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
id okr-10986-29540
recordtype oai_dc
spelling okr-10986-295402021-06-14T10:07:43Z Credit Risk Dynamics of Infrastructure Investment : Considerations for Financial Regulators Jobst, Andreas A. INFRASTRUCTURE INVESTMENT CREDIT RISK FINANCIAL REGULATION INFRASTRUCTURE PROJECT FINANCE INSURANCE REGULATION BANKING REGULATION INSURANCE CAPITAL SOLVENCY REGIME BASIL III 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. 2018-03-29T17:09:00Z 2018-03-29T17:09:00Z 2018-03-22 Working Paper http://documents.worldbank.org/curated/en/606411522326750586/Credit-Risk-Dynamics-of-Infrastructure-Investment-Considerations-for-Financial-Regulators http://hdl.handle.net/10986/29540 English CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Working Paper
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
topic INFRASTRUCTURE INVESTMENT
CREDIT RISK
FINANCIAL REGULATION
INFRASTRUCTURE
PROJECT FINANCE
INSURANCE REGULATION
BANKING REGULATION
INSURANCE CAPITAL
SOLVENCY REGIME
BASIL III
spellingShingle INFRASTRUCTURE INVESTMENT
CREDIT RISK
FINANCIAL REGULATION
INFRASTRUCTURE
PROJECT FINANCE
INSURANCE REGULATION
BANKING REGULATION
INSURANCE CAPITAL
SOLVENCY REGIME
BASIL III
Jobst, Andreas A.
Credit Risk Dynamics of Infrastructure Investment : Considerations for Financial Regulators
description 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.
format Working Paper
author Jobst, Andreas A.
author_facet Jobst, Andreas A.
author_sort Jobst, Andreas A.
title Credit Risk Dynamics of Infrastructure Investment : Considerations for Financial Regulators
title_short Credit Risk Dynamics of Infrastructure Investment : Considerations for Financial Regulators
title_full Credit Risk Dynamics of Infrastructure Investment : Considerations for Financial Regulators
title_fullStr Credit Risk Dynamics of Infrastructure Investment : Considerations for Financial Regulators
title_full_unstemmed Credit Risk Dynamics of Infrastructure Investment : Considerations for Financial Regulators
title_sort credit risk dynamics of infrastructure investment : considerations for financial regulators
publisher World Bank, Washington, DC
publishDate 2018
url http://documents.worldbank.org/curated/en/606411522326750586/Credit-Risk-Dynamics-of-Infrastructure-Investment-Considerations-for-Financial-Regulators
http://hdl.handle.net/10986/29540
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