Can a RW of 190% be applied to long-term strategic investments in non-listed equity exposures as per Article 155(2) CRR, provided that they are in a sufficiently diversified portfolio?
Article 155(2) CRR, under IRB simple risk weight approach, provides that (i) a 190% RW should be applied to private equity exposures in sufficiently diversified portfolios, (ii) a 290% RW should be applied to exchange traded equity exposures and (iii) a 370% RW should be applied to other equity exposures.
A definition of private equity can be found in EBA Guidelines on specification of types of exposures to be associated with high risk, under Article 128(3) of Regulation (EU) No 575/2013, applicable to standardized approach, indicating that investments in private equity include any investment that meets both of the following conditions:
According to the same paragraph, “any investment in which the institution has the intention to develop a strategic business relationship with the enterprise it has invested in should not be considered as private equity. The latter may still be assigned to the high-risk asset class for other reasons but should not be considered investments in private equity.”
As a result, long-term strategic investments in non-listed equity should not automatically be considered a high-risk item for the purpose of article 128 and they should be applied 100% RW as per article 133(2) (under standardized approach).
In IRBA, while article 155(2) does not specify whether long-term strategic investments in non-listed equity should be treated as private equity exposures, the Q&A 2022_6369 clarified the notion of “private equity exposures in sufficiently diversified portfolios” under Article 155(2) and 155(3), as applicable to “(i) any non-listed equity exposures or (ii) exposures to shares or units of CIUs, for which among the underlying exposures there are non-listed equity exposures”. However, the Q&A 2022_6369 does not explicitly mention whether this also includes long-term strategic investments.
Nevertheless, a different treatment between these two types of exposures (i.e., long-term strategic investments in non-listed equity and private equity investments) would lead to a discrepancy between Standard (where long-term strategic investments in non-listed equity are applied a lower RW than private equity investments) and IRB simple risk weight, where it would be the opposite.
Therefore, to standardize the treatment of long-term strategic investments in non-listed equity between Standard and IRB simple risk weight and in line with Q&A 2022_6369, long-term strategic investments in non-listed equity should be considered as private equity for the purpose of article 155(2) and be eligible to a 190% RW (in IRB simple risk weight), provided that they are in a sufficiently diversified portfolio.
Under the Internal ratings based approach, Article 155(2) of the CRR specifies three different risk weights under the simple risk weight approach, depending on whether the exposure is a private equity exposure in a sufficiently diversified portfolio, an exchange traded equity exposure.
The EBA/GL/2019/01 (Guidelines on specification of types of exposures to be associated with high risk under Article 128(3) of Regulation (EU) No 575/2013) clarifies that investments in which the institution has the intention to develop a strategic business relationship with the enterprise it has invested in should not be considered as private equity for the purposes of these guidelines. As these guidelines apply for the sake of calculating risk weighted exposure amounts to exposures under the standardised approach, the notion of strategic business relationship introduced there is not applicable for the sake of calculating risk weighted exposure amounts to exposures under the Internal ratings based approach.
Therefore, private equity exposures toward an enterprise where the credit institution has the intention to develop a strategic business relationship should be risk weighted with a 190% if they are in a sufficiently diversified portfolio, and 370% otherwise.