The B20 SA finance and infrastructure task force is making a big push for the G20 to relax Basel III capital requirement rules in a bid to give banks more room to invest in infrastructure projects to reignite Africa’s economy and integration.
At the heart of the recommendations by the task force is to support investment in infrastructure, increase access to capital and enhance the flow of funds between investors and infrastructure projects and society, including small and medium enterprises.
Basel III was meant to make banks safer and prevent a replay of the 2008 financial crisis. Banks are required to hold a minimum amount of capital to remain solvent and protect their depositors’ investments.
To determine how much capital to maintain, banks assign risk to every type of asset.
However, Standard Bank group CEO Sim Tshabalala, wearing his hat as chair of the task force, said the capital requirements impose disproportionately high-risk weights on infrastructure investments. He said this discourages banks and insurers from allocating capital to long-term projects and that infrastructure should be treated as a distinct and specialised asset class with appropriate capital treatments and risk weights.
Under the present Basel III rules, risk weightings are usually assigned 100%-150%, depending on credit quality, maturity and external ratings. For example, a higher-rated project might get a risk weighting of 75%, while those rated below investment grade could attract a risk weighting of more than 100%.
The task force makes the point that, if risk weights for long-term infrastructure were reduced, this would free up billions in infrastructure investments for the continent.
“For example, what this would mean is that if a project is below investment grade with a risk weighting of say 150%, and we lend R100m, we will have RWA [risk-weighted assets] of R150m. We then have to hold capital for these RWA — in SA at a minimum requirement of 8.5% (and Standard Bank’s CET1 target is 12.5%).
“So we would have to hold a minimum of R12.75m of capital,” Tshabalala said, speaking on the sidelines of the lender’s Africa Unlocked conference.
“If the risk weighting was reduced to 50%, RWA on that same loan would be R50m, and the minimum capital requirement would be R4.25m. This makes a huge difference to how much we either could or would lend to support this infrastructure project. We could lend three times as much at a risk-weighting of 50% compared to 150%.”
Funding gap
The African Development Bank has said that the continent needs to spend about $170bn a year to meet its infrastructure needs.
“At the moment we are able to mobilise about half the required amount, creating an African infrastructure funding gap of $85bn a year. For SA alone, the gap could be about $29bn. So anything we can do to close this gap is extremely helpful,” Tshabalala said.
“We also recommend interventions to better reflect the potential for direct and indirect derisking provided by multilateral development banks and development finance institutions, due to their high credit ratings, expertise in due diligence, structuring and established relationships with governments,” he said.
The global financial crisis of 2008-09 was caused by the collapse in the value of US homes, as well as the globally circulated securitised and mortgage debt that had funded a long boom in US house prices.
SA financial institutions were largely insulated from the global meltdown, as they had fairly limited exposure to foreign structured finance products and were subjected to fairly conservative financial regulation and risk management practices within the context of sound macroeconomic policies.
Tshabalala said it is important to remember this, as the task force asks for wiggle room to allow banks to channel more capital towards infrastructure projects, with about 600-million Africans not connected to the grid.
“Basel has been implemented in SA on the gold standard. SA is one of the leaders in the world in implementing Basel I, II, III and the Basel endgame. I would rank SA’s implementation in the top three in the world,” he said.
“Much of the maladies that Basel was calculated to prevent were not prevalent in SA at the time of the global financial crisis. Part of the reason that SA banks did not require government bailouts is because the tradition in SA is of tight regulation of the financial sector.”
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