This chapter sets out the approaches that a bank can use to calculate the risk-weighted assets for equity investments in funds.

Version effective as of 01 Jan 2023

Consequential changes resulting from changes to scope of internal ratings-based approach for credit risk that come into effect due to the December 2017 Basel III publication and the revised implementation date announced on 27 March 2020.

Introduction

60.1 Equity investments in funds that are held in the banking book must be treated in a manner consistent with one or more of the following three approaches, which vary in their risk sensitivity and conservatism: the "look-through approach" (LTA), the "mandate-based approach" (MBA), and the "fall-back approach" (FBA). The requirements set out in this chapter (CRE60) apply to banks' equity investments in all types of funds, including off-balance sheet exposures (eg unfunded commitments to subscribe to a fund's future capital calls). Exposures, including underlying exposures held by funds, that are required to be deducted under CAP30 are excluded from the risk weighting treatment outlined in this chapter (CRE60). Illustrative examples of the requirements set out in this chapter are set out in CRE99.

The look-through approach

60.2 The LTA requires a bank to risk weight the underlying exposures of a fund as if the exposures were held directly by the bank. This is the most granular and risk-sensitive approach. It must be used when:

(1) there is sufficient and frequent information provided to the bank regarding the underlying exposures of the fund; and