The revival of the securitisation market is an important element of the EU’s Capital Markets Union. In order to shift reliance from European banks to the capital markets, it has been acknowledged that securitisations may play an increasingly meaningful role.
When the previous – to some extent prohibitive – calibrations came into effect, many insurers left the securitisation market. To support the idea of the Capital Markets Union, insurance companies and asset managers investing on their behalf need to return to the market, particularly in light of the empirical result that the performance of most European securitisations has been excellent throughout and since the period of the financial market crisis.
New solvency capital requirements for securitisations
In response to the revised European regulation for securitisations (EU) 2017/2402, a delegated regulation (EU) 2018/1221 was published on 10 September 2018 as amendment to the Solvency II regulation (EU) 2015/35. The aim was to harmonise existing legislation with the newly established framework for simple, transparent and standardised (‘STS’) as well as other, non-STS securitisations, and extends to standardising requirements for the whole Financial Services sector. In fact, the Solvency II regulation and the securitisation regulation overlapped in certain areas. However, the main change from the new delegated regulation relates to the calculation of capital requirements for securitisations, specified by a revised Article 178 of the Solvency II regulation.
As part of these changes, the stress factors were modified, replacing the previous ‘Type 1’, ‘Type 2’ and ‘Resecuritisations’ categories with the new classifications of ‘Senior STS’, ‘Non-senior STS’, ‘Non-STS’ and ‘Resecuritisations’. Under the new regulation, lower stress factors are allocated to Senior STS securitisations, making them potentially more attractive for insurers. The same applies to the calibrations of Non-senior STS securitisations, of which stress factors are also lower in comparison to their previous treatment as Type 2 securitisations.
STS securitisation and insurers’ asset allocation
The new solvency capital requirements for securitisations have been in effect since 1 January 2019. It remains to be seen if the investment behaviour of European insurers will change. According to research by BDO, securitisations represented only 3 percent of the total fixed income holdings of 20 EU (re)insurers in 2018. Allianz, for example, had invested 4 percent of its fixed income holdings in asset-backed securities (ABS), mainly mortgage-backed securities (MBS), in 2018. Of this securitisation portfolio, 98 percent received an investment grade rating, with 91 percent rated ‘AA’ or better.
Notwithstanding that a significant improvement compared to the previous treatment of Type 1 securitisations has been achieved and calibrations of Senior STS tranches are reduced, the impact for insurers may still be limited. The fixed income portfolio of an insurer is typically concentrated towards the mid or lower end of the investment grade spectrum, with longer maturities matching the asset/liability management needs. Therefore, Senior STS securitisations do not play a major role. For Non-senior STS tranches, calibrations under the new delegated regulation are up to three to four times the capital charges for corporate bonds, whereas yields in asset-based securitisations are not three to four times those of corporate bonds.
Disparity between treatment across Financial Services sectors
Furthermore, the goal to harmonise and standardise requirements across the Financial Services industry was not fully achieved. Although the delegated regulation led to a certain harmonisation of requirements, the substantially more conservative capital requirements that insurers need to meet in comparison to banks when making investments in securitisations remain. This may affect the level of confidence in the new regime to create a coherent framework to support a safe and well-regulated securitisation market in Europe, an important element of the Capital Markets Union.