Response to consultation on Guidelines on specification of types of exposures to be associated with high risk
Go back
Anyway, further exposures classifiable in the high risk category should be clearly identified, in order to avoid uncertainty in interpretation of the correct prudential treatment for purposes of supervision.
The reference to three assets classes (Corporate, Equity and Other items) seems in fact too broad in order to identify any other types of exposures potentially carrying a high risk of loss due being structural differences to the exposures classes set out in Article 11 CRR points g), p) and q).
to adopt temporary measures to classify these investments, which would no longer be deemed highly risky after the adoption of revised Standardized Approach for credit risk agreed by the Basel Committee on Banking Supervision as part of its Basel III finalisation in December 2017 (January 2022).
Even the Proposal Regulation of European Commission amending Regulation EU 575/2013 of November 2016 (as part of Risk Reduction Measures Package) amends the list of high risk exposures excluding the investments in private equity and venture capital and the investments in AIF (Alternative Investment Funds) with certain requirements.
Accordingly, ABI suggests a coordination of the guidelines regarding the banks exposures in private equity and venture capital with the timeline of the new coming regulatory framework.
Furthermore, the guidelines define, among others, banks’ investments in private equity and venture capital firms any non-debt exposures (or debt exposures of similar economic substance) not listed on an exchange which conveying a subordinated residual claim on the assets or income of an enterprise.
This definition, that is an own initiative contribution by EBA is not defined in EU legislation neither is in line with banks’ understanding of what constitutes a private equity investment: this could create a classification problem, as banks’ divisions making such investments would be forced to give a 150% risk-weight to activities that they do not currently recognise as private equity. In our understanding banks are aware of what is a private equity and venture capital investment.
Having said that, with reference to the definition laid down, we propose to introduce, in the case of debt instrument, an evaluation case by case with regard to the economic substance of the investment and/or the contractual clauses of the instrument - and the related involvement by the banks - to asses if the investment could be considered as private equity or venture capital.
Moreover all the investment where the institution has the intention to develop a strategic business relationship with the enterprise it has invested in shall not be considered as private equity for the purposes of these Guidelines. The reason is linked with the asset classification that cannot be at the same time both private equity or ‘other’ typology. In fact those type of investments are acknowledged as long term positions aimed at supporting the regular business activities.
Regarding the Private Equity Funds that are compliant with the AIF Article 4(1)(a) of Directive 2011/61/EU and where the mandate of the fund does not allow a leverage higher than that required under Article 51(3) of Directive 2009/65/EC should be explicitly excluded from the high risk classification in alignment with the interpretation of the current CRR.
Question 1: Do you agree with the proposed clarifications in paragraphs 2 and 3? Would you like to bring forward arguments which potentially mitigate the caveats of the alternative approach for defining what constitutes an investment in private equity?
We do not agree with the proposal since other exposures different from the one already listed in CRR Article 128(2) and in paragraphs 5a and 5b of the EBA CP already represents clear segments that can be affected by a high risk of loss. For the remaining perimeters, considering that it will be very improbable, as also recognized by EBA, that other exposures (such as Corporate, Retail) can be classified as high risk, we deem more appropriate to concentrate and require investigation on perimeter where the risk of high loss is more likely, avoiding a burden of activities on process and classification sides for the Banks on those segments where the frequency of being a high risk exposure is very unlikely.Anyway, further exposures classifiable in the high risk category should be clearly identified, in order to avoid uncertainty in interpretation of the correct prudential treatment for purposes of supervision.
The reference to three assets classes (Corporate, Equity and Other items) seems in fact too broad in order to identify any other types of exposures potentially carrying a high risk of loss due being structural differences to the exposures classes set out in Article 11 CRR points g), p) and q).
Question 2: Do you agree that the identification of high risk items is particularly relevant for some of the existing exposure classes?
NAQuestion 3: Do you have any comments or concerns regarding the proposed scope of the exposures at least to be analysed according to paragraph 5? Should more guidance be provided as regards other types of exposures? If yes, please provide specifications.
ABI considers that the guidelines referring to banks exposures in private equity and venture capital raise concerns as they would require banksto adopt temporary measures to classify these investments, which would no longer be deemed highly risky after the adoption of revised Standardized Approach for credit risk agreed by the Basel Committee on Banking Supervision as part of its Basel III finalisation in December 2017 (January 2022).
Even the Proposal Regulation of European Commission amending Regulation EU 575/2013 of November 2016 (as part of Risk Reduction Measures Package) amends the list of high risk exposures excluding the investments in private equity and venture capital and the investments in AIF (Alternative Investment Funds) with certain requirements.
Accordingly, ABI suggests a coordination of the guidelines regarding the banks exposures in private equity and venture capital with the timeline of the new coming regulatory framework.
Furthermore, the guidelines define, among others, banks’ investments in private equity and venture capital firms any non-debt exposures (or debt exposures of similar economic substance) not listed on an exchange which conveying a subordinated residual claim on the assets or income of an enterprise.
This definition, that is an own initiative contribution by EBA is not defined in EU legislation neither is in line with banks’ understanding of what constitutes a private equity investment: this could create a classification problem, as banks’ divisions making such investments would be forced to give a 150% risk-weight to activities that they do not currently recognise as private equity. In our understanding banks are aware of what is a private equity and venture capital investment.
Having said that, with reference to the definition laid down, we propose to introduce, in the case of debt instrument, an evaluation case by case with regard to the economic substance of the investment and/or the contractual clauses of the instrument - and the related involvement by the banks - to asses if the investment could be considered as private equity or venture capital.
Moreover all the investment where the institution has the intention to develop a strategic business relationship with the enterprise it has invested in shall not be considered as private equity for the purposes of these Guidelines. The reason is linked with the asset classification that cannot be at the same time both private equity or ‘other’ typology. In fact those type of investments are acknowledged as long term positions aimed at supporting the regular business activities.
Regarding the Private Equity Funds that are compliant with the AIF Article 4(1)(a) of Directive 2011/61/EU and where the mandate of the fund does not allow a leverage higher than that required under Article 51(3) of Directive 2009/65/EC should be explicitly excluded from the high risk classification in alignment with the interpretation of the current CRR.