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.
Details
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Author
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Document Date
2018/03/22
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Document Type
Working Paper
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Report Number
124720
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2018/04/23
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Disclosure Status
Disclosed
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Doc Name
Credit risk dynamics of infrastructure investment : considerations for financial regulators
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Keywords
demand for infrastructure investment; efficient allocation of capital; Fiscal and Debt Sustainability; information and communication technology; private investment in infrastructure; real estate investment trust; public investment in school; Internal rate of return; Adaptation to Climate Change; financing of infrastructure investment; institutional investor; European Economic Area; credit risk profile; separate asset class; debt securities; debt security; insurance companies; source of funding; credit risk analysis; Cash flow; global economic growth; demand for good; consumption over time; power generation capacity; greenhouse gas emission; nationally determine contribution; asset and liability; sovereign wealth fund; private sector performance; fixed income risk; Fixed income securities; share of output; standard of living; corporate debt security; public capital spending; savings and investment; amount of investment; multilateral development bank; financing development; privileges and immunity; global financial system; master limited partnership; fixed income security; construction and operation; declining interest rates; balance sheet structure; equity risk premium; interest rate volatility; source of income; investments in infrastructure; return on asset; barriers to investment; extreme weather event; assessment of risk; commercial bank fund; rates of return; accessibility of information; project finance transaction; source income; global financial crisis; structure of credit; recovery rate; credit performance; Infrastructure Finance; advanced economy; regulatory treatment; solvency ii; default rate; study period; infrastructure asset; financial regulation; high capital; Insurance Regulation; industry sector; expected loss; long-term finance; construction phase; long-term liabilities; risk parameters; corporate loan; commercially viable; downgrade risk; risk model; financial instrument; default risk; risk characteristic; investment grade; private capital; public-private partnership; default probability; Investment strategies; long-term investment; social infrastructure; existing asset; guaranteed rate; subordinated bond; debt fund; premium income; pension plan; operational management; underlying asset; transaction cost; construction period; Energy Sector; regulatory environment; regulatory barrier; income instrument; development of capacity; risk drivers; risk appetite; fiscal space; insurance industry; anecdotal evidence; present value; expected return; discount rate; long-term funding; long-term exposure; asset-liability matching; insurance sector; Loan structure; bond issue; internal capital; aggregate demand; rising cost; capital intensity; currency risk; return differential; commercial financing; accelerating growth; market competition; unsecured lending; derivative transaction; credit obligation; productive capacity; infrastructure service; calibration approach; empirical evidence; global shocks; investor demand; efficient market; critical infrastructure; traditional credit; carrying costs; capital demand; green technology; long-term investor; productivity growth; affordable service; income gap; budgetary constraint; rising debt; government spending; Capital Investments; government borrowing; private investor; concessional financing; public deficit; fast train; sustainable investment; carbon footprint; long-term obligations; global framework; Fixed annuities; investment spending; insolvency proceeding; address datum; Public Infrastructure; efficient transportation; real growth; Basic Sanitation; investment opportunities; energy flow; digital connectivity; credit quality; financial intermediation; Market Risk; premium payment; derivative market; risk-free investment; defined-benefit pension; aggregate risk; market sector; project accounting; regulated utility; cash outflow; quality datum; life insurance; data sample; solvency margin; construction risk; regulatory constraint; individual investment; debt investment
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Citation
Jobst,Andreas Alexander;
Credit risk dynamics of infrastructure investment : considerations for financial regulators (English). Washington, D.C. : World Bank Group. https://documents.worldbank.org/curated/en/606411522326750586/Credit-risk-dynamics-of-infrastructure-investment-considerations-for-financial-regulators