With regard to private equity investment (§2 and 3 of the draft Guidelines), Article 128 paragraph 2 of CRR contains provisions that refer to “investments in private equity” and “investment in venture capital firms”. These terms are not defined in the EU legislation.
The FBF is of the view that a positive and prescriptive definition is not necessary.
Indeed, Article 128 of CRR is currently being reviewed as part of the ongoing CRD/CRR negotiations. The final version of the CRR Regulation that emerges from this process may delete any specific reference to these “investments in private equity” and “investment in venture capital firms”.
The FBF would welcome this simplification. Indeed it would avoid an automatic non-risk-based classification and would encourage institutions to conduct a case by case assessment with regard to the economic substance of the investment and/or the contractual clauses of the instrument.
As mentioned by the EBA in its draft Guidelines, “the revised SA for credit risk agreed by the Basel Committee on Banking Supervision as part of its Basel III finalization in December 2017 no longer includes provisions on “higher risk exposures” as the Basel II standard currently does”. Under the revised framework, we acknowledge that venture capital exposures are identified in the definition of “speculative unlisted exposures” (SA - §51). However, private equity exposures are not mentioned in this article. On the contrary, the Basel Committee specifies that “investments in unlisted equities of corporate clients with which the bank has or intends to establish a long-term business relationship […] would be excluded”.
Finally, with reference to banks exposures in private equity and venture capital, the FBF suggests a coordination of the guidelines with the timeline of the new coming regulatory framework.
Therefore, the FBF suggests the EBA reconsider its approach and refrain from proposing any definition for these exposures.
Should the EBA nonetheless proceed to offer definitions, for which the FBF is of the view that the EBA has gone beyond its mandate by defining these investments in its draft RTS, the following issues should be considered:
• Venture capital is a sub-category of private equity. Our understanding is that “investment in venture capital firms” should only cover indirect investment in venture capital transactions.
• Investments in private equity referred to in point (c) of Article 128 of Regulation (EU) No. 575/2013 are only direct investments in private equity qualified as high-risk. The term “private equity”, which encompasses equity share capital not listed on public exchanges, can be used to refer to fundamentally different types of exposures. Indeed, different types of private equity investment strategies exist, mainly related to the maturity stage of the company and / or the type of investment tool used in the transaction. These exposures types do not bear the same risk. Therefore, Institutions should consider that investments in private equity referred to in point (c) of Article 128 of Regulation (EU) No. 575/2013 cover any direct investment in private equity that falls into either the “Venture Capital” or the “Distressed PE or Special situations” definitions (investment in companies that need restructuring, turnaround).
With reference to speculative immovable property financing (art 128(2) of CRR) we believe that the current definition of “speculative immovable property financing” is too wide and the 150% RW according to the art. 128 (2 d) - do not capture the right risk-sensitivity of this kind of Exposures. In fact, the “High Risk” of exposure depends on the “uncertainty” of the result of operation of sale. When the risk does not depend on this uncertainty, the exposure deserves to be treated as a traditional exposure to firm.
i. A minimum level of presales (combined with a min level of shareholders’ funds) prevents us from a high level market risk and diminishes the uncertainty of the sale price of the asset (and the speculative nature of the project)
ii. The legal framework in some countries which allows the direct and immediate transfer of ownership to the buyer, hence decreasing the risk for the developer
iii. The developers’ activity is not to speculate but to give added value to the project (in building an asset on a land).
iv. The Basel 3 paper gives flexibility not to give a 150% weight in case of presale/prelettings
We suggest specifying exposures that cannot be considered high risk exposure. For example: 'Speculative immovable property financing' means loans for the purposes of the acquisition of or development or construction on land in relation to immovable property, or of and in relation to such property, with the intention of reselling for profit where pre-sale or pre-lease contracts don’t amount to a significant portion of total contracts or substantial equity at risk”.