Bank Lending in Project Finance: The New Regulatory Capital Framework

Abstract

The paper aims to examine the new regulatory framework of project finance in the economics of banking firms. In particular, the paper investigates the uniqueness of the project finance, the significant importance of the project finance in bank activity, and the role of the new bank capital requirements to promote the innovative financial scheme.

In the project finance business loans terms and characteristics are primarily based on the assets and quality of the project to be financed. It means that the usual bank rating models for lending business might not been implemented in the project finance lending. Quantitative estimates of credit risk could not be always possible in project finance lending. Consequently, the new regulatory capital requirements framework gives banks the option to implement a qualitative method – a supervisory slotting criteria approach – to evaluate credit risk in project finance lending business. The regulatory capital requirement recognizes project finance as specialized lending. The paper provides a summary of the treatment of the project finance in the New Basel Capital Accord.

The paper is organized as follows. Section 1 provides a general description of project finance. Section 2 identifies the economic and financial uniqueness of project finance loans and credit risk assessment process. Section 3 delineates the impact of the new regulatory capital requirements framework on project finance lending. Final sections concludes.

Keywords: project finance, specialized lending, bank capital requirements, credit risk

JEL Classification: G10, G18, G20, G21, G30, G32, M20, M21