Response to consultation on Guidelines on specification of types of exposures to be associated with high risk
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Paragraph 3 of the draft foresees that – apart from listed equity and apart from investments where the institution has the intention to develop a strategic business relationship with the enterprise it has invested in - equity exposure that is held with the intention of generating a profit through any kind of sale should be treated as exposures associated with particularly high risk.
This approach is not convincing. The intention of generating profit by selling private equity is pretty normal and does not indicate a higher risk. The profit criterion has a connection with risk only, when the ability of the borrower to repay a loan depends on his success in making profits when selling the items financed by the loan. This argument does not fit to equity investments as these investments are not repaid anyway.
Therefore the other approach mentioned in the explanatory box on page 12 would be preferable at least with an additional exception for all cases where the institution has the intention to develop a strategic business relationship with the enterprise it has invested in.
Paragraph 3 should read therefore as follows:
All non-listed equity is private equity unless:
a) a credit assessment for the equity issuer by a nominated ECAI (issuer rating) would result in a risk weight lower than 150% for comparable debt exposures to the same issuer; or
b) the institution has sufficient additional information to confirm there is no particularly high risk of loss for the considered investment; or
c) the institution has the intention to develop a strategic business relationship with the enterprise it has invested in.""
Question 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.
4.1. Investments in venture capital firms and/or private equityParagraph 3 of the draft foresees that – apart from listed equity and apart from investments where the institution has the intention to develop a strategic business relationship with the enterprise it has invested in - equity exposure that is held with the intention of generating a profit through any kind of sale should be treated as exposures associated with particularly high risk.
This approach is not convincing. The intention of generating profit by selling private equity is pretty normal and does not indicate a higher risk. The profit criterion has a connection with risk only, when the ability of the borrower to repay a loan depends on his success in making profits when selling the items financed by the loan. This argument does not fit to equity investments as these investments are not repaid anyway.
Therefore the other approach mentioned in the explanatory box on page 12 would be preferable at least with an additional exception for all cases where the institution has the intention to develop a strategic business relationship with the enterprise it has invested in.
Paragraph 3 should read therefore as follows:
All non-listed equity is private equity unless:
a) a credit assessment for the equity issuer by a nominated ECAI (issuer rating) would result in a risk weight lower than 150% for comparable debt exposures to the same issuer; or
b) the institution has sufficient additional information to confirm there is no particularly high risk of loss for the considered investment; or
c) the institution has the intention to develop a strategic business relationship with the enterprise it has invested in.""