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The European Commission is proposing to halve the capital charges for so-called 'type 1' securitisations under the standard formula, moving away from recommendations made by the European Insurance and Occupational Pensions Authority (EIOPA).
According to sources familiar with the draft version of the Solvency II delegated acts, AAA-rated type 1 securitisations will attract a capital charge of 2.1%. Charges of 4.2%, 7.4% and 8.5% are imposed on AA, A and BBB securitisations, respectively.
Simon Richards, head of insurance solutions at Insight Investment, an investment manager, in London, says the more favourable treatment of securitisations may prevent insurers from becoming forced sellers of the asset class. But, he adds, unless spreads of ABS widen significantly, the reduction is unlikely to spur demand for new investment because securitisations are still treated as much more risky assets than equivalently-rated corporate bonds.
Under the proposals, AAA-rated corporate bonds with a duration of less than five years (0.9%) would attract a charge that is less than half of the charge imposed on one-year type 1 AAA-rated securitisations. The gap widens for lower-rated ABS or those with higher duration.
More than corporates, covered bonds are expected to be an appealing asset class for insurers seeking alternatives to ABS. Covered bonds are debt securities backed by cashflows from mortgages, but they remain on the issuer's balance sheet.
The capital charge they attract is slightly lower than the charge on corporates and they offer exposure to underlying assets similar to ABS investments, says Andrew Currie, London-based managing director of European structured finance at rating agency Fitch.
The onerous treatment of securitisations under Solvency II has been a contentious topic for some time. Over the past year, charges have been reduced three times and now stand three times lower than was proposed by EIOPA in its long-term guarantees assessment in June.
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