Project finance is facing its greatest external threat for many years. Despite being less risky than lending to corporates it is penalized by the new Basle capital accord (Basle II). As it stands, Basle II will fundamentally alter the structure of the market. A greater polarization will occur between price makers and price takers, and non-bank players will grow at the expense of banks unable to qualify for advanced status. Over the long term, the project finance market has the potential to grow disproportionately when compared with commercial banking as a whole and in theory should represent an attractive proposition for banks looking for balance sheet income.
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