Update on Basel regulations impacts on the financing of infrastructure projects ! Michel BILGER Confederation of International Contractors' Associations 7 November 2017

Basel 1 Basel 2 Basel 3 Basel 4 So why ? Evolution of the banking regulation First bank solvency ratio Basel 1 1988 Own funds Risks Basel 2 2004 Risks : Internal models Basel 3 Own funds : quality & quantity 2010 Basel 4 So why ? 2017 ?

The view of the Basel Committee : The challenge is to complete the Basel 3 reform September 2011: the Basel Committee launched a program of evaluation of the implementation of Basel 3. This program aims to ensures the concordance of the regulations and the consistency of the produced measures Market risk Janv. & déc. 2013 Report on RWA in the trading activities Credit risk July 2013 & April 2016 Report on RWA in the banking activities Report to G20 November 2016 Reduction of the excessive variability 1 – Review of standard risk methodologies 2 – Stricter control of internal models 3 – Introduction of « floors »

Page 4 – ESR Financial Conglomerate - May 2016 The view of the industry: The reform is dubbed “Basel 4” given the far reaching effects ! It is a revolution ! The process set up by sequence (successive consultations : standard methods then models and calibration) did not properly analyze the risks and impacts. This is a step backwards compared to the sensitivity measures of risks introduced by Basel 2 and it may reintroduce the negative effects of Basel 1 (move to riskier loans...) There are technically strong contradictions in the consultations (there is even no common definition of default !) It promotes the shadow banking It will penalize customers Page 4 – ESR Financial Conglomerate - May 2016

The European system must tend towards an American-style system a secure model !

Page 6 – ESR Financial Conglomerate - May 2016 Two logics oppose … The standard methods for the daily risk and stress tests "top-down" to the extreme risk Better integrate supervision constraints to internal management to encourage better risk assessment by the use of finer management methods A very external oversight institutions, disconnected from their internal management Intrusive supervision mobilizing substantial resources Page 6 – ESR Financial Conglomerate - May 2016

Update on Basel regulations impacts on the financing of infrastructure projects

The normal shape of a risk curve

Basel 4 is less risk sensitive : The example of corporates !

Less risk sensitive weightings

The output floor New standard Output floor Current sensitive but > 2 Output floor 3 Current sensitive 1 but 3 > > 1 !

The impacts would be very significant ! For real estate : a move to the standardised approach would represent a 230% increase in capital requirements For specialised lending : a move to the IRB-Foundation approach would multiply capital requirements by 2 to 4 depending on the project.

Page 13 – ESR Financial Conglomerate - May 2016 3 challenges for banks ? Banks face at the same time 3 challenges that can affect their ability to finance the economy: a regulatory impact (Basel 3) increases the cost of intermediation by requiring more capital, more resources "bailinable", a technology shock that facilitates competition from non-banks (platforms that facilitate contacts, access to payments…) very low rates that erode margins banking intermediation Page 13 – ESR Financial Conglomerate - May 2016

The risk of unintended consequences on the global economy and society Volumes Prices

Update on Basel regulations impacts on the financing of infrastructure projects What can we do ?

But if there is an agreement in Basel, it is not the end of it ! A review clause ? From recommandations to regulations A very long phasing : 2026 to 2029 ? The regulatory offsets (« Pillar 2 ») ? Randal Quarles, 60 ans, qui a été sous-secrétaire au Trésor sous George W. Bush et dirigeait jusqu'ici un fonds d'investissement

Statements are quite reassuring… ” As a result of this assessment, the Committee will focus on not significantly increasing overall capital requirements”.   “The EBA also believes that the Basel Committee should avoid that the new proposals lead to significant increase in overall capital requirements and preserve the core strength of the IRB approach, namely a high degree of risk-sensitivity”. Danièle Nouy And Basel III, the centre piece of regulatory reform, is about to be finalised (...). There will be no significant further increases in capital requirements, and we are not discussing Basel IV. Regulatory reform is coming to an end. Page 17

Current proposals are not calibrated to differences in markets Mutual mobilization is essential ! Current proposals are not calibrated to differences in markets and they use too much a « one size fits all » approach… Recognition of the quality of the team and models in terms of capital requirements Recognition of : * the benefit of dual recourse on the property AND on the borrower. * the fixed rate borrower's benefits