In a July 17 speech at the 11th Handelsblatt annual conference on Solvency II in Munich, Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (Eiopa), said the authority is "convinced" that the revised capital charges for securitisations "will allow the insurance sector to provide meaningful long-term financing within a sustainable environment".

 

However, insurers and asset managers insist that the present calibrations will halt all future investment in ABSs by insurers. Current rules incorporated in the draft Solvency II delegated acts assign a 2.1% capital charge multiplied by each year of modified duration to high-quality ‘type A' securitisations. Type A instruments are those backed by strictly defined pools of assets, including residential mortgages, loans to small and medium-sized enterprises (SMEs) and credit card receivables. They must also conform to certain criteria: for example, they must be rated BBB- or above and admit no ‘clawback' (return of assets) to the seller.

 

Laurent Clamagirand, chief investment officer at Axa in Paris, says the current list of criteria should be simplified, and that criteria relating to clawback, servicing and information disclosure are "not fully necessary in a regulation". He adds that regulators should favour flexible mechanisms to define and control the criteria, and set up a Prime Collateralized Securities label system to identify quality securitisations before issuance, to be conferred by an independent private or public body.

 

Experts say the capital charges themselves are out of step with the treatment of their unsecuritised counterparts. Richard Hopkin, London-based managing director and head of securitisation at the Association for Financial Markets in Europe, says: "Under Solvency II, if you're an insurer and decide to buy a portfolio of five-year residential mortgage loans where you're exposed to the first pound of loss, there are some circumstances where you would hold 0% capital against that, whereas if you buy the same pool and it's structured as an RMBS, you have to hold 10.5% of capital against that."

 

Eugene Dimitriou, London-based senior vice-president at asset manager Pimco adds: "The charges are so punitive as to effectively say to insurers from a capital perspective: ‘We don't want you to be invested in securitisations'". Dimitriou further claims that European Union institutions are working at cross-purposes on the issue of securitisations: "You have Eiopa pushing in a particular direction and the European Commission pushing in another. The former is saying we don't want insurers investing in securitisations and the latter is saying from a macro perspective we need insurers to become investors so that lending is not concentrated in the banking community. There is a difference in views that is yet to be resolved," he says.

 

Axa's Clamagirand claims that regulators are working on a new categorisation for SME securitisations with a lower capital charge to bolster this portion of the market. But this is not the message from Eiopa. A spokesperson for the authority says: "The draft delegated acts for Solvency II, including the treatment of insurers' investments in securitisation, are stable on substance and will be adopted by the commission this summer. The criteria to identify high-quality securitisation are consistent with those recommended by Eiopa in its public report in December 2013. The calibration has already been cut very significantly in the consultation process with member states experts. We are not considering [going] further down".

 

Full article (Risk.net subscription required)