Remembering Financial Crises: The Risk Implications of the Rise of Institutional Investors in Project Finance

Barely a decade ago, a cascading sequence of market failures threatened to topple the global financial system. Public responses to the recent Financial Crisis were immediate and drastic to resuscitate the global economy while attempting to make the markets safer. Many financial services sectors have since recovered to pre-crisis levels. One such industry is project finance, which comprises various financing arrangements often used to fund long-term infrastructure or industrial projects. Curiously, significant post-crisis banking regulations and other global credit enhancement initiatives are pushing banks out of project finance and giving rise to institutional investors. This Comment argues that animated institutional activity in project finance may increase both financial and, more notably, governance risks. Further, increased institutional investment in project finance shifts the risk intended to be captured under new banking regulations to unregulated markets and makes the financial system more complex and interconnected. Ultimately, public responses to the Financial Crisis may have the unintended consequence of increasing project-level risks and injecting seemingly regulated systemic risk back into the global financial system.