Asset managers and evolving prudential capital regimes

The evolution of European prudential capital regulations is set to dominate 2025 Asset Manager’s Agenda, notably the latest revision of the Capital Requirements Regulation and Directive (CRR III/CRD VI) and the upcoming changes to the Solvency II Directive.

These updates pose new challenges for investment funds distributed to EU banks and insurance companies, potentially increasing funds’ inherent regulatory capital charges and overhauling relevant reporting processes.

To meet institutional investors’ needs, asset managers were expected to deliver updated capital requirement calculations and reporting templates as early as January 2025.

Beyond the impeding effects, the revised prudential capital rules will drive asset managers to reconsider their strategic approach regarding product development, investor relations and operational processes.

The year 2025 is set to deliver significant developments for asset managers whose investor base comprises European banks and insurance companies, thanks to substantial changes to prudential regulatory and reporting requirements. These include the revamp of the CRR III/CRD VI banking package, the Solvency II Directive review, and the upgraded Tripartite Template (TPT v7.0).

While not directly in scope of banking and insurance rules, asset managers are affected when their funds are invested in by EU banks and insurers, as well as by funds of funds with these institutions on their capital books. This is due to the regulatory capital costs that banks and insurance companies must sustain against the assets (and corresponding risks) held within their balance sheets.

Under EU prudential capital rules, investment fund allocations can induce a hefty capital requirement if the underlying asset/risk composition or the fund’s inherent capital cost cannot be determined.

Accordingly, EU banks and insurance companies collect granular information on a fund’s composition to determine the associated regulatory capital costs. This is typically achieved through reporting templates tailored to the specific principles, classifications and treatments of the applicable prudential regulations, including CRR, CRD and Solvency/TPT.

The revisions to the CRR and Solvency frameworks underline a general modernization of the regulatory capital calculation, promoting a more sensitive, risk-based approach that reflects the current economic environment. The overhaul is set to affect investment funds on several fronts.

• The most impactful changes are the revised capital charges applied to several asset classes, including equity, debt and derivatives. Adapting to the latest methodologies can lead to substantial differences compared to investment funds’ current risk-weighted assets (RWA), banks’ credit valuation adjustments (CVA), and insurers’ solvency capital requirements (SCR).
• While the new regimes are expected to increase investment funds’ regulatory capital charges across the board, the scope and magnitude vary significantly depending on asset allocation and regulatory-specific considerations. Notably, equity funds’ risk weights will gradually increase following the CRR III update, with current ratios to more than double over the next five years. This includes publicly traded and private equity funds.
• Several regulatory asset classifications, such as unrated institution exposures, are also being revisited, and new ones are being introduced, notably the preferential capital treatments for eligible long-term equity investments and specialized lending.
• Enhanced approaches to technical capital requirement calculations are also being applied. This includes a full redraft of CVA methods under CRR III, as well as interest rate risk and the symmetric adjustment of equity capital charge under the amended Solvency II Directive. 
• The new rules define the timeframe for integrating the new capital charges — notably, the equity charge increase under CRR III — and for developing a prudential capital approach for specific investment types, including sustainability risk-sensitive assets, crypto assets and securities financing transactions.
• Data processes for collecting investment information and regulatory classifications also face a material upheaval, mandating new data points and comprehensive criteria to support the application of lower capital charge classifications.  

Asset managers must adapt their reporting processes to meet the evolving demands of banks and insurance investors in the face of new prudential capital requirements.

For banks, the new exposure classes and the capital treatment revision for unrated institutions demand higher granularity and quality standards for CRR III reporting feeds. The exacting eligibility criteria for preferential capital treatments will also complicate data and regulatory classifications.

On the insurance side, the industry standard for exchanging investment funds’ “look-through” information under Solvency II is upgrading to TPT v7.0, starting from the March 2025 reporting date. This update adds new fields for several asset classes — particularly bonds, private debt and infrastructure — while enhancing granularity/data quality expectations on existing fields, such as NACE, maturity dates and counterparty information.

To meet banks and insurers’ dynamic needs, asset managers must offer data management systems capable of collecting, classifying, and calculating capital requirement measures per the latest regulatory rules. Their reporting processes must also be in tune with the latest technical template specifications, including Solvency II, TPT reporting, and ad-hoc banking reporting templates.

Insufficient reporting data quality, granularity or timeliness can mean significant repercussions for institutional investors, leading to incorrect capital charge calculations, compromised regulatory classifications and treatments, missed reporting deadlines, and even supervisory fines.

The evolving prudential capital frameworks allow asset managers to rethink their investment and product strategies and develop attractive regulatory capital and operational solutions.

Prudential treatment modifications can alter the capital cost of specific investments, disrupting the “cost-adjusted” attractiveness across different asset classes. For specialized and single-class investment funds, these can materially impact their value proposition to institutional investors.

Certain investment categories like infrastructure and long-term equity may be eligible for lower capital charges, denoting a reduced degree of risk than other broad asset classes. Qualifying for this preferential treatment requires meeting stringent classification, granular investment information and/or independent attestation criteria.

For banks and insurers, a solid accounting of regulatory capital from investment fund exposures is crucial to determine their own prudential needs and manage regulatory risks. By developing robust reporting processes and expertise on institutional investor regulations, asset managers can cultivate long-term investor relationships and foster effective product strategies within the ever-evolving prudential capital regimes.

To discover how KPMG Luxembourg can help you seamlessly manage these changing requirements and mine the related opportunities, get in touch.