Revised policy framework for banks' equity investments in funds issued by the Basel Committee
13 December 2013
The Basel Committee on Banking Supervision has today published a final standard that revises the prudential treatment of banks' investments in the equity of funds within the Basel risk-based capital framework. The revised policy framework is scheduled to take effect from 1 January 2017 and will apply to banks' equity investments in all funds (eg hedge funds, managed funds and investment funds) that are not held for trading purposes.
The revised framework includes three approaches for setting capital requirements for banks' equity investments in funds. This hierarchy of approaches provides varying degrees of risk sensitivity and has been adopted to incentivise due diligence by banks and transparent reporting by the funds in which they invest.
The Committee's objective in revising the current treatment of banks' equity investments in funds was to develop an appropriately risk-sensitive and consistently applied risk-based capital regime. The revised standard improves upon the existing regime by:
- incorporating a fund's leverage when determining the capital requirements for banks' investments;
- clarifying the application of the Basel framework's capital adequacy standards for credit risk; and
- more appropriately reflecting the risk of a fund's underlying investments, including a higher capital requirement for situations in which a fund's holdings are not sufficiently transparent.
The revised framework will also help address risks associated with banks' interactions with shadow banking entities by ensuring that exposures to funds engaging in shadow banking activity are supported by adequate capital. The work of the Basel Committee therefore contributes to the broader effort by the Financial Stability Board to strengthen the oversight and regulation of shadow banking.
This final standard takes into account comments on the Committee's July 2013 proposals. It has been revised to simplify the application of the different approaches, to make clear that partial use of the approaches is permitted and to take account of banks' use of third-party calculations for determining relevant risk weights. In addition, it specifies that the leverage adjustment should be applied to the average risk-weighted assets of a fund in a manner that roughly approximates proportional consolidation of the fund.
The Basel Committee thanks those who took the time and effort to express their views during the consultation process.