CRR2-Infrastructure Supporting factor

CRR treatment : None.

CRR2 treatment [Article 501(a)]: Infrastructure investments that strengthens competitiveness and simulates jobs can avail a reduction in the risk weight assets by using the infrastructure supporting factor of 0.75 (e.g. if the original risk weight was 100%, for eligible infrastructure projects after applying the reduction factor the effective risk weight will be 75%).

To qualify for this supporting factor, all the conditions listed below should be met:-

1)      the exposure should be included in the corporate exposure class, excluding exposures in default;

2)      the exposure is to an entity which was created specifically to finance or operate physical structures or facilities, systems and networks that provide or support essential public services;  

3)      At least two third of the repayment of the loans should be sourced from income generated by the assets being financed [e.g. if the loans is for £10 million, then at least £6.7 million of the repayment should be sourced from income generated by the project];

4)      the borrower can meet its financial obligations (i.e. repayments) even under severe stress conditions (related to the project risks);

5)      the cash flows that the borrower generates are predictable and cover all future loan repayments during the entire period of the loan [e.g. revenues are subject to rate-of-return regulation/take-or-pay contract, or guaranteed by central government that is assigned a 0% risk weight];

6)      the re-financing risk of the exposure is low or adequately mitigated [e.g. grants or funding provided by central government that has a  0% risk weight or Public Sector Enterprise that has a risk weight at 20%];

7)      the contractual agreement provide the bank with a high degree of protection;  

8)      the obligation is senior to all other claims (other than statutory claims) and claims by derivative counterparty;

9)      where the project is under construction, then the equity investor should meet all the following conditions:-

a.       have a history of successfully overseeing infrastructure projects with good financial strength,

b.       the equity investor should have a low risk of default, or in the event of a default there should be low risk of material losses for the bank, and

c.       there are adequate mechanisms in place to align the interest of the equity investors and the bank

10)   the bank has adequate safeguards in place to ensure completion of the project (on budget, on time, experienced constructor, strong completion guarantees) and adequate contractual provisions for liquidated damages;

11)   proper management of operational risk (if material);

12)   the bank uses tested technology and design;

13)   all necessary permits and authorisations are in place;

14)   the bank uses derivatives only for risk-mitigation purposes; and

15)   the bank has assessed that the project contributes to environmental objectives (climate change mitigation/adaption, sustainable use and protection of water and marine resource, transition to a circular economy – waste prevention and recycling, pollution prevention and control and protection of healthy ecosystems).

Implementation timeline: As per CRR2 this was planned to be implemented starting 28th June 2021. However, due to Covid-19, the EU implemented a ‘quick fix’ on 24 June 2020 (EU 2020/873) and brought the date of implementation forward to 27th June 2020.