In a consultation paper released in September 2022, we set out the factors we were considering in our assessment of the appropriate risk weight for banks to apply to the investments in the BGF. This is a key component determining the level of capital that banks must hold for this investment, Director of Prudential Policy Kate Le Quesne says.
Following our review of submissions received, we have announced our decision to implement a 250% risk weight for bank investments in the BGF.
“The central focus of our approach to risk weights is to align the weights with underlying risk, which is in line with international best practice,” Ms Le Quesne says.
Due to the diversification benefits that the BGF will provide, the risks associated with bank investments in the BGF are likely to be lower than equity investments in a single entity, as the BGF will invest in a wide range of entities. This supports a lower risk weight than the 400% risk weight for investments in single entities, which would apply under the status quo treatment.
We will monitor BGF developments and remain open to reconsidering whether the risk weight remains appropriate.
What are risk weights?
Risk weights are used to convert the actual size of an exposure into a risk-weighted asset. A more risky exposure will have a higher risk weight. Banks are required to hold a minimum percentage of capital against these risk weighted exposures. Higher risk exposures mean a bank will need more capital – money provided by the owners (shareholders) of a bank. This ensures that the owners have a meaningful stake in the bank – the more the bank’s owners have to lose, the more they will want to make sure the bank is run properly.
More information
Proposals to enhance clarity of risk weighting requirements, September 2022
