Basel II could cost European firms EUR10 billion

Basel II could cost European firms EUR10 billion

The European Private Equity & Venture Capital Association (EVCA) has warned that European firms stand to lose between EUR5bn and EUR10bn in equity finance if the proposed Basel II regulations are implemented.

Commenting on the Basel Committee's third consultative paper (CP3), EVCA - Europe's main private equity association, says: "The current Basel II draft could lead to a significant retreat by banks from private equity and venture capital funds due to the proposed changes in risk weightings for assessment of business risk.

"This could deprive European companies (mainly small and medium-sized enterprises) of an annual flow of equity finance of between €5bn and €10bn."

EVCA adds that the risk weightings currently proposed for the industry do not correspond with business realities. In the current draft the loss given default is set at 90 per cent, but analysis of business realities suggests that when in a situation of default, investors on average lose 56 per cent of their investment, significantly lower than the figure set.

The EVCA's comments follow criticism of the Basel draft from other groups and associations including the European Banking Federation, the British Bankers' Association and the US-based Securities Industry Association (SIA).

Last week the Institute of International Finance (IIF) added its criticisms to the debate, saying it was "concerned by the cost of creating compliance systems to accommodate the new regulatory standards and the complexity of the proposed new framework."

The IIF, which represents over 330 financial institutions worldwide, said there was also a "lack of coordination between the Basel Committee and the International Accounting Standards Board (IASB)" especially regarding loan provisioning. The Institute also criticised the lack of incentives for banks to implement the new rules.

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