Global banking regulators have revised their rules to ensure that banks have enough capital to account for their equity investment fund holdings and to reflect their exposure to the shadow banking sector.
Late last week, the Basel Committee on Banking Supervision published a final standard that revises the capital treatment of banks’ investments in the equity of various sorts of funds, such as hedge funds, managed funds, and investment funds. The new rules are scheduled to take effect in January 2017 and will apply to banks’ equity investments in all funds that are not held for trading purposes.
The regulators’ goal in revising the current treatment of banks’ equity investments in funds is “to develop an appropriately risk-sensitive and consistently applied risk-based capital regime.” It also aims to 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 Basel Committee’s revised framework includes three approaches for setting capital requirements for these exposures; which, it says, “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.”
It also aims to improve on the existing regime by: incorporating a fund’s leverage when determining the capital requirements for banks’ investments; clarifying the treatment of credit risk; and, imposing a higher capital requirement for situations in which a fund’s holdings are not sufficiently transparent.
The publication of the final standard follows comments received on proposals in this area that were issued in July.