Are banking rules and regulations a constraint on the kind of investment in infrastructure that countries need, at rates they can afford?
Absa’s head of strategy, Punki Modise, has now climbed on the regulatory bandwagon, adding her voice to calls by Standard Bank Group CEO Simpiwe “Sim” Tshabalala for banking regulators to loosen capital rules to aid infrastructure investment. Tshabalala chairs this year’s B20 finance and infrastructure task team, which aims to make recommendations to the G20.
SA’s G20 presidency made it a priority to put Africa’s debt woes and debt costs on the agenda of the global forum. The high cost of capital is one of the big issues. As a summit hosted by Standard Bank and the B20 heard last week, it’s not so much that African countries are more indebted than others, but that they pay so much for their debt. Many countries spend more on the interest bill than they do on health and education. That constrains their ability to invest in the infrastructure and other public goods their countries desperately need.
Tshabalala and others have pointed to an Africa perception risk premium, with ratings agencies and investors accused of attaching higher risk ratings to Africa than to other emerging market and developing economy regions, even though the probability of default is not necessarily higher. It’s one of the issues being discussed in the expert panel led by former finance minister Trevor Manuel, advising current finance minister Enoch Godongwana on what to put on the table for the G20.
In a sense, it’s this notion that seems to feature in Tshabalala and Modise’s call for looser banking regulation to stimulate infrastructure investment and sustainable and climate finance more generally, in SA and the rest of the continent.
The Basel regulations for banks require them to hold a certain amount of capital to back their risk-weighted assets. Different assets — in other words loans — carry different risk weightings, depending on how likely the borrowers are to default and whether their loans are secured (home loans, for example, are secured by immovable property, so tend to carry lower risk weightings, and relatively less capital requirements).
Deem infrastructure projects to be less risky, and banks would have to hold less capital against their exposures, so they could charge less for those project loans. It is an appealing argument. And it is certainly true that the Basel rules have been tightened up considerably since the global financial crisis of 2008/09, precisely because the regulations at that time, particularly in the US, weren’t adequate to prevent US banks from taking on hugely risky loan portfolios that ran into huge trouble.
The loans banks make are made with depositors’ money, and the Basel rules are designed to protect the depositors by requiring banks to hold capital to back their loans in case of default. Which is why the capital rules were tightened up postcrisis. And the banks price in the regulatory costs in the interest they charge.
It is possible the rules are too tight to enable affordable lending in areas such as infrastructure. Tshabalala and Modise certainly seem to think so. If they are right, they must make their case, in detail, to the banking regulators, here and globally — since the standards are set in Basel by the world’s central bankers.
But we need to treat their campaign with a measure of caution. Bankers are inevitably going to talk to their book. Of course they want looser rules. And if for infrastructure, then why not for housing or education or any number of other things? Reserve Bank governor Lesetja Kganyago has expressed precisely that concern — the capital rules were designed to protect the banking system against risk, and if they are diluted for infrastructure, other sectors could quickly follow, and the rules might end up being ineffectual.
In any event, as last week’s summit heard, there is much that countries can and should do to address that Africa risk premium in their own right, by being more transparent and strategic in their communications with investors and ratings agencies, as well as by implementing reforms.
Likewise, there is much that can and should be done by governments to bring well-designed and bankable infrastructure projects to market.
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