Basel III G: Shadow Banking and Project Finance

Abstract

The Net Stable Funding Ratio (NSFR), a liquidity standard introduced by Basel III, seeks to promote a better match between the liquidity of a bank’s assets and the manner in which the bank funds those assets. The NSFR requires banks to maintain a minimum amount of funding deemed “stable” by the Basel framework based on the liquidity of the banks’ assets and activities over a one-year timeframe. One of the areas seen as most affected by this development may be bank participation in project finance for infrastructure development. Since the global demand for infrastructure development remains robust, the shadow banking system may emerge as a significant source of project finance. This case considers whether the requirement that banks better match their assets and sources of funding is affecting bank business models and what it means for the availability of credit, and whether there are risks associated with the growing role of shadow banking in project finance.  

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28