* Basel sticks with punitive 1,250 pct risk weighting
* Rejects banks' calls for investment threshold
* Banks will need to show clearer assessment of risk
By Huw Jones
LONDON, Dec 13 Banks will have to hold more
capital to cover investments in some "shadow banks", such as
hedge funds and private equity, from January 2017, global
regulators said on Friday.
The new rule is part of wider efforts by the Group of 20
economies (G20) to contain risks in the $70 trillion shadow
banking sector, which was criticised for its opacity by
regulators during the 2007/09 financial crisis.
Shadow banking comprises borrowing and lending outside the
tightly regulated mainstream sector and regulators want banks to
think twice before investing.
The rule, written by the Basel Committee of global banking
supervisors, covers investments by banks in all types of funds,
including plainer and less risky mutual funds, to harmonise how
they are treated by regulators worldwide.
Banks work out how much capital they must hold by assigning
"risk weights" to investments and assets they hold.
Currently investments in funds have a relatively moderate
weighting of up to 150 percent, which can leave bank's
shareholders in the dark over the true level of risk on the
lender's core book.
Under the new rule, banks will have to be able to show
regulators that a fund investment is low-risk or be saddled with
a risk weighting of 1,250 percent.
This would mean having to set aside capital roughly equal to
the investment itself - a punitive charge that regulators hope
will give banks a clear incentive to ensure they have a thorough
understanding of the investment and are therefore able to
identify an adequate level of capital cover.
Basel ignored calls for significant changes to the draft
rule put out for consultation earlier this year, retaining a
three-stage approach to totting up risks from investments in
The more due diligence banks carry out, the more favourable
the capital treatment will be.
The Institute of International Finance, a global banking
industry body, and the Association for Financial Markets in
Europe, had criticised the 1,250 percent risk weighting as being
out of proportion and sought a reduction to 400 percent.
Basel also rejected industry calls for an investment
threshold below which the three-stage approach would not apply.