European banks will have to hold 50 percent more capital in reserve against investments in private equity and hedge funds under draft capital rules being considered by the European Union to curb risk.
Lenders will have to price risky investments at one-and-a-half times their current value, according to a draft European Commission document obtained by Bloomberg News, and so hold more regulatory capital against those holdings on their balance sheets to cover potential losses.
The higher-risk categories include “investments in venture capital firms, private equity investments, hedge funds and speculative real estate financing and investments,” according to the undated document.
Barclays Plc, the British bank run by Robert Diamond, plans to sell more than 500 million pounds ($814 million) of stakes in private equity funds, five people with knowledge of the talks said yesterday. Barclays follows Citigroup Inc., Royal Bank of Scotland Group Plc and Credit Agricole SA in trying to sell holdings in private equity funds before tighter capital rules come into force.
“We need to remember that 150 percent is still not a very high risk weight,” Irina Sinclair, a London-based financial regulation lawyer at Allen & Overy, said in a telephone interview today. “It will be felt, that’s for sure, but it won’t break a bank.”
The draft measures, drawn up by the EU’s executive arm, are part of the bloc’s implementation of globally approved capital rules known as Basel III, which were designed by the Basel Committee on Banking Supervision.
Michel Barnier, the EU’s financial services commissioner, promised to submit formal proposals by the end of the year. The commissioner has said the EU’s version of the Basel measure may need to be adjusted to make sure they don’t hinder growth in the region.
The Group of 20 nations has sought to bolster banks’ liquidity and capital to prevent a repeat of the worst financial crisis since the Great Depression.
“The G-20 leaders have endorsed the Basel agreements and their full and timely implementation,” Stefan Walter, the Basel group’s secretary general, said in an interview in Basel, Switzerland, last week. “And so it will be important for these countries to continue to follow through on these commitments as they are implemented on the ground.”
EU proposals must be approved by lawmakers at the European Parliament and ministers from the 27 EU nations before they can take effect.
Chantal Hughes, a spokeswoman for the commission in Brussels, declined to comment.