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Basel 3, banks and bonds
15 April 2010
The last set of capital adequacy regulations – Basel II – had a nasty set of surprises for project lenders. The new regulations – Basel III – are blunter, but no less worrying for the project market. Paul Smith reports.
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A blunter approach to credit risk in a new set of global bank regulations will likely see an increase in the cost to banks of holding long-term project debt. Although the exact form the Basel III regulations will take is still unknown, three broad changes will likely make it more difficult for banks to make long-term debt commitments to infrastructure projects.
The three legs of Basel III
Firstly, banks will need greater tier one capital. Basel III will considerably tighten the definition of what constitutes tier one capital. This will be calculated as a percentage of a risk-adjusted asset base that will include all corporate loans, project financings and some ECA loans. The stress tests in the UK and US used a deterioration of 4% of tier one capital to test bank solvency, so banks will probably be asked to hold roughly 5-8% to provide them with a buffer against...
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