Real estate trade bodies are arguing for EIOPA to re-assess its capital charges under Solvency II, saying they are unduly harsh on commercial mortgage-backed securitisations.
The Commercial Real Estate Finance Council (CREFC) and the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) proposed that some CMBS should qualify as 'Type A' assets, and therefore be subject to the proposed lower floor of 4.3%, from the current level of 7%.
Type A assets are generally consumer-related - such as residential mortgages and auto loans/leases - but also include SME loans, the securitisation of which is seen by policy makers as an avenue to supporting economic recovery. Everything else, including CMBS, whole business, trade receivable ABS, and CDO/CLOs, gets lumped in to the Type B category, where the capital charge starts at 12.5%.
While CREFC and INREV welcome the effort EIOPA has made in assessing how capital treatment for insurers investing in securitisation might be improved, they warn that regulatory capital treatment that hits the insurance community risks "causing irreversible damage to the CMBS market by placing it at a serious disadvantage to other comparable investments."
Another aspect of capital charges also cited is the so-called "securitisation penalty", where underlying loans incur a lower charge than those in securitised format. Structural provisions in capital structures, such as credit enhancement through reserve funds and subordination, excess spread and covenants, all contribute to giving a senior tranche more security that the underlying loan itself.
EIOPA ruled out CMBS as qualifying as Type A securities because of the sector's poor performance and spread volatility.
"We accept that a trade-off has to be made between simplicity and fairness [and recognise the appeal of simplicity], but we do not consider it appropriate for all CMBS to be classified as higher risk, higher cost Type B securitisation," trade bodies said.
The trade bodies acknowledge certain faults in CMBS such as inconsistent alignment of interest between originators and investors. They are trying to address these by improving industry practices, for instance through the Market Principles for Issuing European CMBS 2.0 launched in November 2012 as a way to improve confidence in the sector.
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