Article 133
Equity exposures
1.
All of the following shall be classified as equity exposures:
(a)
any exposure that meets all of the following conditions:
(i)
it is irredeemable in the sense that the return of invested funds can be achieved only by the sale of the investment or sale of the rights to the investment or by the liquidation of the issuer;
(ii)
it does not embody an obligation on the part of the issuer;
(iii)
it conveys a residual claim on the assets or income of the issuer;
(b)
instruments that would qualify as Tier 1 items if issued by an institution;
(c)
instruments that embody an obligation on the part of the issuer and meet any of the following conditions:
(i)
the issuer is able to defer the settlement of the obligation indefinitely;
(ii)
the obligation requires, or permits at the issuer’s discretion, settlement by issuance of a fixed number of the issuer’s equity shares;
(iii)
the obligation requires, or permits at the issuer’s discretion, settlement by issuance of a variable number of the issuer’s equity shares and, ceteris paribus, any change in the value of the obligation is attributable to, comparable to, and in the same direction as, the change in the value of a fixed number of the issuer’s equity shares;
(iv)
the holder of the instrument has the option of requiring that the obligation be settled in equity shares, unless one of the following conditions is met:
(1)
in the case of a traded instrument, the institution has demonstrated to the satisfaction of the competent authority that the instrument is traded on the market more like the debt of the issuer than like its equity;
(2)
in the case of non-traded instruments, the institution has demonstrated to the satisfaction of the competent authority that the instrument should be treated as a debt position;
(d)
debt obligations and other securities, partnerships, derivatives or other vehicles structured in such a way that the economic substance is similar to the exposures referred to in points (a), (b) and (c), including liabilities from which the return is linked to that of equities;
(e)
equity exposures that are recorded as a loan but arise from a debt-equity swap made as part of the orderly realisation or restructuring of the debt.
For the purposes of the first subparagraph, point (c)(iii), obligations include those that require or permit settlement by issuance of a variable number of the issuer’s equity shares, for which the change in the monetary value of the obligation is equal to the change in the fair value of a fixed number of equity shares multiplied by a specified factor, where both the factor and the referenced number of shares are fixed.
For the purposes of the first subparagraph, point (c)(iv), where one of the conditions laid down in that point is met, the institution may decompose the risks for regulatory purposes, subject to the prior permission of the competent authority.
2.
Equity investments shall not be treated as equity exposures in any of the following cases:
(a)
the equity investments are structured in such a way that their economic substance is similar to the economic substance of debt holdings which do not meet the criteria set out in paragraph 1;
(b)
the equity investments constitute securitisation exposures.
3.
4.
The following equity exposures to unlisted companies shall be assigned a risk weight of 400 %, unless those exposures are required to be deducted or risk weighted in accordance with Part Two:
(a)
investments for short-term resale purposes;
(b)
investments in venture capital firms or similar investments which are acquired in anticipation of significant short-term capital gains.
By way of derogation from the first subparagraph of this paragraph, long-term equity investments, including investments in equities of corporate clients with which the institution has or intends to establish a long-term business relationship and debt-equity swaps for corporate restructuring purposes shall be assigned a risk weight in accordance with paragraph 3 or 5, as applicable. For the purposes of this Article, a long-term equity investment is an equity investment that is held for three years or longer or incurred with the intention to be held for three years or longer as approved by the institution’s senior management.
5.
Institutions that have received the prior permission of the competent authorities may assign a risk weight of 100 % to equity exposures incurred under legislative programmes to stimulate specified sectors of the economy, up to the part of such equity exposures that in aggregate does not exceed 10 % of the institutions’ own funds, that comply with all of the following conditions:
(a)
the legislative programmes provide significant subsidies or guarantees, including by multilateral development banks, public development credit institutions as defined in Article 429a(2) or international organisations, for the investment to the institution;
(b)
the legislative programmes involve some form of government oversight;
(c)
the legislative programmes involve restrictions on the equity investment, such as limitations on the size and types of businesses in which the institution is investing, on allowable amounts of ownership interests, on the geographical location and on other relevant factors that limit the potential risk of the investment for the investing institution.
6.
Equity exposures to central banks shall be assigned a risk weight of 0 %.
7.
An equity holding that is recorded as a loan but that has arisen from a debt-equity swap made as part of the orderly realisation or restructuring of the debt shall not be assigned a risk weight lower than the risk weight that would apply if the equity holding were treated as a debt exposure.