European firms could lose €5-€10 billion in equity finance if new rules on bank capital are implemented, Europe's main private equity association has warned.

This latest in a series of attacks on the proposed rules comes from the submission of the European Private Equity & Venture Capital Association to the so-called Basel committee of central bankers and regulators, which has devised the rules.

The new Basel II rules are intended to match the amount of capital banks are required to hold by regulators more closely with the risks they take in their businesses. But the EVCA 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 firms (mainly small and medium-sized enterprises) of an annual flow of equity finance of €5-€10 billion."

A drop in funds available to private equity and venture capital houses would also hit their fees. They typically charge 1½-2 per cent of funds under management.

The Basel II rules are undergoing a period of consultation in Europe and the US. They are due to be finalised by the end of the year, before implementation at the start of 2007.  - (Financial Times Service)