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Post by Sapphire Capital on Sept 23, 2009 8:45:50 GMT 4
Bank Participation in Private Equity Funds: Risk Implication and Capital Adequacy Debarshi Sanyal ANZ Banking Group August 24, 2009 Abstract: Commercial banks, financial intermediaries and insurance companies often hold private equity (PE) and venture capital investments. 15.6% of new PE investments in Europe during 2003-2007 came from banks. During 2000-2007 banks invested 12.4% of new funds for buyouts in the US. Adequate capitalization of these portfolios is extremely important for financial stability in view of the recent financial market crisis. This study reviews the Basel Committee prescriptions for private equity capital adequacy and estimates the systemic risk and regulatory capital requirements of a private equity portfolio by using a benchmark PE index. The Value at Risk assessments are based on an ARMA-GARCH forecast model. The study finds that the Basel II capital prescriptions lack joint calibration between various methods and can lead to substantial undercapitalization of these portfolios in light of the recent financial market volatility. Whereas the Basel II simple risk weight prescription for PE stands at 400% the study finds that in general anything less than 900% can be undercapitalizing the portfolios. On a long horizon a minimum risk weight of 760% is found to be appropriate. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1460577_code1191023.pdf?abstractid=1460577&mirid=3
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