The Basel Committee on Banking Supervision on December 13, 2013 approved an amendment to Basel II risk-weights for fund investments. The new standard increases risk-weights for fund investments. The new Basel standard, if adopted by national banking supervisors, will apply to an internationally active bank. In the United States, it would extend to a bank holding company that controls a US bank, including one controlled by a foreign bank, and to the bank holding company’s subsidiaries and affiliates. Basel I, II and III require banking organizations to meet prescribed risk-weighted minimum capital requirements determined by dividing the banking organization’s capital by its risk-weighted assets. The higher the asset risk-weight, the more capital a banking organization must maintain to meet capital adequacy requirements. The new standard may prove to be another deterrent for banking entities seeking to acquire or maintain fund investments in addition to the final rules issued on December 10, 2013 by the US financial agencies to implement the Volcker Rule limits on permissible investments in private equity and hedge funds.
Starting January 1, 2017, this new capital standard will require banking organizations in home countries adopting the Basel standard to have at least one dollar of regulatory capital for each dollar invested in a fund, unless a risk-weighting of the fund’s actual investments or those permissible under the fund’s mandate is possible and produces a lower risk-weighting. Risk-weighting of a fund’s assets, however, must include a charge for the fund’s leverage that will result in the same dollar-for-dollar capital requirement for investments in funds treated as “highly leveraged.” Not surprisingly, commenters on the proposed version of the new standard called it “punitive.”
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