Basel II: Assessing the Default and Loss Characteristics of Project Finance Loans (A)

In June 1999, the Basel Committee on Banking Supervision announced plans to revise the capital standards for banks. The Basel Committee believed that project loans were significantly riskier than corporate loans and, therefore, warranted higher capital charges under the new proposal (known as Basel II). Bankers, fearing that higher capital charges would damage project lending by lowering profits and driving borrowers to nonbank competitors, formed a consortium to oppose the proposal by studying the actual default and loss characteristics of their combined portfolios of project loans. The study showed that project loans were not riskier than corporate loans. Armed with this data, the consortium sent a letter to the Basel Committee in August 2002 urging them to lower the proposed capital charges on project finance loans.