Bank Participation in Private Equity Funds: Risk Implication and Capital Adequacy
20 Pages Posted: 25 Aug 2009 Last revised: 24 Nov 2009
Date Written: August 24, 2009
World markets have seen a dramatic growth in Private Equity (PE) in the last decade. Substantial portion of the new investments in PE has come from commercial banks. This study estimates the regulatory capital requirement of standard PE portfolios and evaluates various methods proposed in the Basel II regulatory guideline, in the light of the growing concern for adequate capitalisation of bank portfolios. Value-at-risk assessments are based on an ARMA-GARCH forecast model. Whereas the Basel II simple risk weight prescription for PE stands at 400% the study finds that less than 900% risk weights could be undercapitalising the portfolios.
Keywords: Private Equity, Regulatory Capital, Risk Management
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation