kiyohiko g nishimura : what should we learn from the eurozone crisis? a regulatory - reform perspective speech by mr kiyohiko g nishimura, deputy governor of the bank of japan, at the institute of international bankers 2012 annual washington conference, washington dc, 7 march 2012. * 1. * * introduction : two “ once - in - a - century ” crises just three years apart let me begin by thanking the institute of international bankers for inviting me to join the leading international bankers today. i am delighted and honored to have the opportunity to deliver this speech at the 2012 annual washington conference. it is a great pleasure for me to return to washington d. c. from tokyo after 30 years of absence, especially as it is just two weeks before the cherry blossom festival officially begins. i vividly remember the festival on the mall in 1982 when i lived here. in fact, this year is special not only for me but also for all washingtonians and tokyoites. this year marks the centennial anniversary of the gift of these 3, 000 cherry trees from tokyo to washington d. c. in 1912. the washington cherry trees have rooted strongly, survived the elements, and withstood the test of time. their blossoms come into full bloom every spring so as to make us feel eternal peace and serenity, regardless of economic cycles, market swings, and in particular, financial crises. alan greenspan once described the “ lehman crisis of 2008 ” as a “ once - in - a - century type event ”. 1 and now we are facing the “ eurozone crisis of 2011 ”. some say the potential magnitude of the fallout from this latter crisis may approach that of the former unless appropriate measures are devised and implemented promptly. thus, we have experienced two once - in - a - century events within three years. indeed, this is quite extraordinary. however, if we look closer at these two crises, we find they are not necessarily isolated events ( or in statistical terms, they are not independent. ) rather a certain factor was active behind both events : important regulatory changes in the united states around 2004. these regulatory changes are seen as having led to excessive leveraging in the united states, culminating in the collapse of lehman brothers. but what is relatively less well known is that these regulatory changes provided fertile ground for the excessive risk taking of european financial institutions as well, making these institutions vulnerable to potential shocks after the lehman crisis, when the sovereign risks of a small periphery country surfaced.

by refinancing bank loans of existing projects, the idfs are expected to take over a significant volume of the existing bank debt and this will release an equivalent volume of fresh lending for infrastructure projects. three idfs – one nbfc by icici bank ltd. and two mutual funds by il & fs and iifcl have been launched in 2013, of which the first one has already started refinancing operations. 20. but a common refrain that i get to hear across various fora is that take out financing model is not working successfully. with all due respect to the proponents of this measure, i have a fundamental issue with the take out financing model. as we discussed earlier, being long - gestation projects, the financiers of infrastructure projects need to pay a lot of attention to the project at the nascent stage. having assumed the risk till the project comes on stream and starts generating stable revenues, i don ’ t understand why a bank would be willing to trade a good credit risk for the risk of funding another greenfield project! 21. i would rather wish that the entities such as infrastructure debt funds / iifcl etc., which are set up to provide take out financing, in view of their expertise in assessing, appraising and financing infrastructure projects, should assume the initial credit risk in such projects and then sell the same to the banks. external commercial borrowing ( ecb ) norms for infrastructure funding 22. under the extant ecb guidelines, there are several concessions given to the infrastructure sector related to credit enhancements, import of capital goods, availment of trade credit, etc. rbi has recently taken several measures to boost infrastructure financing, especially for the projects in roads and power sector, such as relaxing the ecb norms and treating debt due to lenders in ppp projects as secured finance. the definition of bis central bankers ’ speeches infrastructure under the extant ecb guidelines is currently being further expanded to bring it in line with the government of india ’ s harmonized list. this would expand the list to include some of the urban infrastructure items : ( a ) urban public transport and ( b ) water and sanitation, which will include ( i ) water supply pipelines, ( ii ) solid waste management, ( iii ) water treatment plants, ( iv ) sewage projects ( sewage collection, treatment and disposal system ), and ( v ) storm water drainage system. 23. while i do appreciate the recent measures by goi and rbi, i