PPP infrastructure projects require equity and debt financing. While banks play a significant role in infrastructure financing, they are challenged by inherent asset-liability mismatches because they typically have short-term liabilities and infrastructure financing involves long-term assets (Ma 2016). And since financing requirements are large, loans are often syndicated because of regulated limits on single-party exposure.
Pham (2015) analyzes a broad range of potential factors on the determinants of bank credit, using data on 146 countries during 1990-2013. The results suggest that factors restricting credit supply include nonperforming assets, capital requirements, and bank concentration. The results, however, find no evidence on the impact of return on equity and return on assets on the supply of bank credit. In a related paper, Mirzaei and Mirzaei (2011) show that the ratio of cost to income and the capital ratio are the main determinants of profitability, suggesting that higher levels of capitalization reduce funding costs for banks. A major finding of their study is the significant negative relationship between profitability and the ratio of net loans to short-term deposits. This indicates that lending based on short-term deposits negatively affects the profitability of banks.
Kirti (2017) suggests that the liability structure of banks drives the interest-rate exposure of assets, implying that banks with more floating-rate liabilities make more floating-rate loans. The results establish an important link between the funding structure of intermediaries and the types of contracts used by nonfinancial forms. The author shows that banks achieve this by passing on the interest rate risk to firms.2 Two other works advance related arguments. Ivashina, Scharfstein, and Stein (2012) argue that hedging frictions make it advantageous for banks to lend in the same currency as their deposit financing. Hanson et al. (2014) argue that the types of assets intermediaries hold depend on the stability of their funding. More broadly, Kirti (2017) is also connected with the view that there are synergies between deposits and commitments (Kashyap, Rajan, and Stein 2002), and that intermediaries must themselves be incentivized to conduct bank monitoring (Diamond 1984; Holmström and Tirole 1998).