The global financial landscape is currently defined by a stark paradox: while global liquidity remains high and investment in clean energy is projected to reach US$2 trillion this year, emerging markets and developing economies (EMDEs) continue to struggle with a persistent and widening infrastructure financing gap. This disparity is increasingly attributed not to a lack of available capital, but to the regulatory frameworks that govern how that capital is deployed. Specifically, the International Chamber of Commerce (ICC) and various global financial stakeholders have identified the Basel III framework—the international regulatory accord for banks—as a significant, albeit unintentional, barrier to essential project financing in the Global South. As these regulations are currently interpreted and implemented, they often discourage investment in the very regions that require it most to meet economic growth and climate transition targets.
The central challenge lies in the cost of capital, which remains structurally higher in EMDEs than in advanced markets. While the Basel III rules were designed to ensure global financial stability following the 2008 financial crisis, their conservative treatment of project finance and credit enhancement tools has created a "risk-aversion" loop. This loop effectively penalizes investments in developing regions by failing to account for the actual, historically low default rates of infrastructure projects when compared to corporate loans. Consequently, the cost of borrowing for critical energy, transport, and water projects in the Global South remains prohibitively high, suppressing bankable projects and stalling the global energy transition.
The Evolution of Basel III and the EMDE Context
The Basel III standards were developed by the Basel Committee on Banking Supervision (BCBS) in response to the deficiencies in financial regulation revealed by the global financial crisis. The primary objective was to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage. However, the "one-size-fits-all" nature of these standards has had unintended consequences for specialized lending, such as project finance. Unlike traditional corporate lending, project finance relies on the cash flows generated by a specific project for repayment, rather than the general assets of a corporate entity.
In EMDEs, project finance is the primary vehicle for large-scale infrastructure development. However, under the Basel III "Standardised Approach" for credit risk, these projects are often assigned high risk weights. Even under the "Internal Ratings-Based (IRB)" approach, which allows banks to use their own data to calculate risk, the lack of long-term historical data in specific emerging markets often leads to overly conservative risk estimates. This regulatory conservatism persists despite decades of data from the Global Emerging Markets Risk Database (GEMS), which suggests that infrastructure projects in EMDEs often exhibit recovery rates and default probabilities that are far more favorable than the sovereign ratings of their host countries would suggest.
Chronology of Regulatory Implementation and Growing Disparities
The journey toward the current regulatory impasse has spanned over a decade, marked by periodic updates and a shifting global economic focus.
- 2010–2011: The initial Basel III rules are released, focusing on higher capital ratios and new liquidity requirements (Liquidity Coverage Ratio and Net Stable Funding Ratio).
- 2013–2015: Implementation begins globally. During this period, the International Energy Agency (IEA) and the World Bank begin highlighting a growing "investment gap" in the Global South, noting that private capital is not flowing into infrastructure at the required scale.
- 2017: The "Basel III Endgame" (often called Basel IV by industry players) is finalized. It introduces more stringent "output floors" to limit how much banks can reduce their capital requirements using internal models, further impacting specialized lending like project finance.
- 2020–2022: The COVID-19 pandemic and subsequent inflationary pressures exacerbate the cost of capital for EMDEs. Discussions at COP26 and COP27 emphasize the need for "Blended Finance"—the use of catalytic public capital to mobilize private investment.
- 2023–2024: The ICC and other international bodies intensify their advocacy, arguing that without technical and structural reforms to Basel III, the goal of mobilizing trillions for the energy transition in the Global South will remain unattainable.
Data-Driven Insights into the Financing Gap
The scale of the challenge is underscored by recent data from the International Energy Agency and the World Bank. While global clean energy investment is on track for a record US$2 trillion in 2024, nearly 85% of that investment is concentrated in advanced economies and China. This leaves the rest of the world, containing the majority of the global population and the highest projected energy demand growth, with a fraction of the necessary funding.
Research into project finance performance reveals a significant "perception gap." According to long-term studies of infrastructure defaults, project finance loans typically see their risk profiles improve significantly after the initial construction phase. In many EMDEs, the default rates for infrastructure projects are lower than those for similarly rated corporate bonds. Furthermore, when Multilateral Development Banks (MDBs) are involved in a project, the default rates drop even further due to the "preferred creditor status" and the technical oversight these institutions provide. However, the current Basel framework often blunts these benefits, treating co-financed projects with the same level of conservatism as purely private ventures.
Proposed Technical Adjustments and Clarifications
The ICC has outlined a pragmatic, two-stage agenda for reform that seeks to align capital requirements with real-world risk without undermining the safety and soundness of the global banking system. The first stage focuses on "technical adjustments"—clarifications that could be issued by the Basel Committee as "frequently asked questions" (FAQs) or supplemental guidance.
One of the primary technical goals is the broader recognition of Credit Risk Mitigation (CRM) tools. Currently, many guarantees provided by MDBs or export credit agencies are not fully recognized in a way that reduces a bank’s capital charges. By clarifying how these guarantees should be weighted, regulators could immediately lower the cost of capital for projects backed by international institutions.
Additionally, there is a push for more consistent treatment of collateral. In many EMDE projects, the physical assets and the contractual rights (such as power purchase agreements) serve as robust collateral. However, regulatory interpretations often vary, leading to higher capital charges. Targeted clarifications could ensure that banks are rewarded for securing high-quality collateral, thereby encouraging more lending into these regions.
Structural Reforms for Long-Term Stability
The second stage of the proposed reform agenda involves more fundamental, structural changes to the Basel framework. These reforms would require deeper analysis and coordinated efforts between national regulators and the BCBS.
A key structural proposal involves the "Country Risk Ceiling." Currently, a project’s credit rating is often capped by the sovereign rating of the country where it is located. This means a high-quality renewable energy project with guaranteed off-take and international backing might be rated as "junk" simply because the host government has a low credit rating. The ICC recommends a more granular approach that allows projects to "pierce" the sovereign ceiling when there are clear mechanisms in place to mitigate country-specific risks, such as offshore escrow accounts or political risk insurance.
Furthermore, there is a call for a dedicated work program to evaluate the risk weighting of MDB exposures. If banks were allowed to apply lower risk weights to projects where MDBs are lead arrangers or significant participants, it would create a massive incentive for private bank participation. This "multiplier effect" is seen as essential for scaling up the billions of dollars in MDB capital into the trillions required for global infrastructure.
Analysis of Implications: Economic Growth and Climate Goals
The implications of these regulatory shifts extend far beyond the balance sheets of global banks. For EMDEs, the ability to access affordable finance is the difference between achieving the Sustainable Development Goals (SDGs) or falling into a cycle of energy poverty and economic stagnation.
From a climate perspective, the math is simple: the global "Net Zero" goal cannot be achieved if the Global South remains dependent on legacy fossil fuel infrastructure because clean energy alternatives are too expensive to finance. By refining Basel III to better reflect the risks of project finance, regulators can help lower the "Green Premium"—the additional cost of choosing clean technology over carbon-intensive alternatives.
Moreover, these reforms would support the "de-risking" agenda championed by many world leaders. Rather than relying solely on taxpayer-funded aid, the goal is to create a regulatory environment where private institutional investors—such as pension funds and insurance companies—feel comfortable deploying capital into EMDE infrastructure through bank-led syndications.
Official Responses and the Path Forward
While the Basel Committee has traditionally been cautious about modifying the framework, there are signs of a shifting tide. Leaders of the G20 have repeatedly called for "better, bigger, and more effective" MDBs and have encouraged efforts to mobilize private capital. Banking associations in Europe and North America have also signaled their support for reforms that would allow them to better support their clients’ transition efforts in emerging markets.
Critics of the proposed changes warn against "regulatory capture" or the weakening of safeguards that prevent another financial crisis. However, proponents argue that the current system is not just conservative, but inaccurate. They contend that by using real-world data to calibrate risk weights, regulators are actually making the system more robust by encouraging a more diverse and geographically distributed set of investments.
The path forward will likely involve a series of consultative papers and data-gathering exercises. The ICC and its partners continue to advocate for a mandate that requires the Basel Committee to specifically consider the impact of its rules on EMDE infrastructure. As the 2030 deadline for many international development and climate targets approaches, the pressure to harmonize financial stability with global growth objectives has never been higher. The successful "unlocking" of Basel III could represent one of the most significant non-fiscal interventions in modern economic history, providing the financial plumbing necessary to power the next generation of global development.
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