03 November 2022
The European Banking Authority (EBA) today published a Report, which analyses some qualitative as well as quantitative aspects of the lending trends and riskiness of infrastructure loans which have benefitted from a capital reduction due to the introduction of the so-called infrastructure supporting factor (ISF) under the Capital Requirements Regulation (CRR). While data on infrastructure lending is scarce overall, the EBA analysis relied on information received from a sample of banks that participated in a survey launched in April 2022. The data collected is not sufficient to conclude on the impact of ISF on lending or the consistency of the riskiness of the affected loans with the own funds requirements. At the same time, from a broader prudential perspective, and in line with previous EBA recommendations, the continued application of the ISF could be questioned.
61 banks that provide infrastructure lending and account for 57% of the total assets in the EU banking sector responded to the qualitative part of the survey, indicating that two thirds use the ISF, and approximately one third of them changed their lending policies to consider the ISF. The individual criteria for the application of the ISF were mostly assessed as acceptable or somewhat clear and easy to verify by the banks applying the ISF. Given the voluntary nature of the survey, and the resulting sample selection bias, a data quality concern was kept in mind when interpreting the results.
The quantitative analysis was carried out on 11 to 13 banks accounting for 10 to 17% of the total assets of the EU banking sector and covered a time horizon between 2014 and 2015. The quantitative results indicate that infrastructure lending increased in the years immediately after the introduction of the ISF in June 2020, while infrastructure lending subject to ISF also increased, but at a lower rate. In terms of riskiness, banks applying the ISF have a lower risk as measured by default rates and defaulted exposures, but the information on loss rates, an important aspect of riskiness, is not sufficient to conclude about the overall riskiness.
The findings, based on the quantitative data and the qualitative survey, do not allow to conclude on the impact of ISF on lending nor on the consistency of the riskiness of the affected loans with the own funds requirements. In addition, due to the latest Basel III changes as well as the CRR3 proposal that ensure an increased risk sensitivity of the standardised approach (SA), and preserve the IRB risk-sensitivity, the continued application of the ISF could be questioned from a broader prudential perspective.
Legal basis and background
This Report has been produced in accordance with Article 501a of the CRR, which mandates the EBA to carry out an analysis of lending trends and riskiness of the ISF. The legislation introduced the ISF in the CRR2 in the form of a 25% reduction in own fund requirements for specific exposures in corporate or specialised lending categories - with the aim to encourage private and public investments in infrastructure projects. These exposures should be to entities, which were created specifically to finance or operate physical structures or facilities, systems and networks that provide or support essential public services, and that comply with a set of criteria to reduce their risk profile and enhance the predictability of cash flows. While originally planned to apply starting June 2021, the application of the ISF was moved forward to June 2020 due to the COVID-19 pandemic.
DOCUMENTS
Report on the application of the Infrastructure Supporting Factor
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