Today saw the publication of the European Capital Requirements package review, implementing into EU law the standards set at international level by the Basel Committee.
Over the past 5 years, banks invested €21 billion into private equity, making up around 5% of the overall capital raised by these funds. Through private equity, banks supported indirectly thousands of businesses across the continent, including start-ups and scale-ups which benefitted from such equity to grow. Yet, banks’ commitments to the asset class remain very low and have decreased by more than 100% compared to other fundraising sources in the past decade.
In that context, Invest Europe welcomes that, for the first time, “investments in private equity” are no longer deemed “high-risk exposures” in the new framework. Moreover, the explicit recognition that long-term exposures (such as those to closed-ended funds) shall never be considered speculative is a long-awaited step towards acknowledging the actual risk of long-term, non-redeemable commitments.
These helpful changes do not mask the fact that the EU’s strict implementation of the Basel standards will lead to a significant increase in capital charges for banks’ equity investments and still does not appropriately capture the actual risk of long-term capital. If amendments to reflect the specificities of European markets are not introduced during upcoming negotiations, the review could further limit banks’ contribution to long-term growth and, more broadly, to the Capital Markets Union objectives.
As the representative of the European private equity community, including banks investing into equity funds, Invest Europe is looking forward to working with the co-legislators to determine how credit institutions can commit some of their capital to long-term funds while maintaining the high prudential standards of the framework. As we pointed out in a recent opinion piece, it is only by appropriately balancing audacity and prudence that institutional investors will be able to overcome tomorrow’s challenges.
For more details on Invest Europe’s position on the prudential reviews, please look at our position paper here.