Overview of "Solvability ratio" of collective investment funds
Transparency data is increasingly available on investment funds’ performance, risk, and costs, and can be used for market analysis or benchmarking purposes. This article is the first of a series aiming at sharing aggregated analytics on collective investment funds used in different regulatory or business contexts. In this first article, we will focus on the capital requirements for European credit institutions in relation to their units or shares in collective investment funds, and how this capital charge may vary depending on the fund’s investment strategy when applying the look-through principle.
For the purpose of this article, the capital requirement will be estimated based on the standardized approach laid out in Article 132 (4) of the Capital Requirements Regulation EU 575/2013 and will consider credit risk only. The credit risk-weighted assets, also called “Solvability ratio”, is calculated by weighing each exposure held on or off balance by the relevant risk weight. Other risks such as Counterparty-Valuation-Adjustment risk, foreign exchange risk or large exposure risk may lead to additional capital requirements for credit institutions.
Based on an internal analysis based on a representative sample of 200 sub-funds, the table below displays the typical ranges of credit risk-weighted assets which can be expected under the Capital Requirements Regulation for European credit institutions, depending on the investment strategy of the fund. Each candlestick shows the maximum, minimum, 1st and 3rd quartile of risk-weighted assets observed in the sample, for each investment strategy. The capital requirement for credit risk is calculated as 8 percent of the risk-weighted assets.
Distribution of Solvability ratio accross investment funds categories
The table below displays the comparison between the average net performance observed over the last three years and the average credit risk-weighted assets for each investment fund category.
Recent historical performance vs. Solvability Ratio accross different investment funds categories
We hope the above proves useful. Stay tuned, more will follow!
Basel III, CRR, Solva, VAG, GroMiKV, Solvency II, SCR
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