A group of nine industry bodies sent a joint letter to EU policymakers on November 3 calling for an immediate change of tack on the treatment of securitisation, arguing that the current approach is holding back the bloc’s economic recovery.
The plea comes about a month after the European Commission published a report that declared the Securitisation Regulation “fit for purpose” and said that no major legislative changes were necessary, despite about 80% of respondents to the Commission’s consultation complaining that the new rules had failed to improve access to credit in the real economy, widen the investor base for securitisation or bring new issuers to market.
The Commission argued that even if securitisation activity had been muted since the new rules were brought in, this may have been down to other factors, such as the Covid-19 pandemic and the availability of emergency liquidity through central bank programmes, rather than the regulation itself.
But the signatories of the letter disagreed, pointing out that the European securitisation market had dwindled in 2022 even as others had grown, and that the US securitisation market had hit record levels of issuance in 2020 and 2021.
“The absence of a well-functioning securitisation market represents a strategic loss to the European financial system,” they wrote. “It is undermining the competitiveness of European financial institutions and limiting their ability to recycle capital to support new financing.”
The letter detailed a wide range of issues with the regulatory framework, ranging from the way securitisation is treated in the capital regimes for banks and insurance companies to the technical standards for synthetic securitisation, and made concrete suggestions for how they should be changed.
It was signed by the leaders of the Association for Financial Markets in Europe, the Dutch Securitisation Association, the European Banking Federation, Leaseurope and Eurofinas, the International Association of Credit Portfolio Managers, Paris Europlace, Prime Collateralised Securities and True Sale International.
Punitive capital charges
The prudential regime for insurance companies, known as Solvency II, has long been a bugbear for market participants, who complain that the capital requirements for securitised products are disproportionate to the risks and place them at a disadvantage to comparable asset classes such as covered bonds.
“There are some insurers that buy ABS, but they’re few and far between because of Solvency II,” said a head of ABS portfolio management at a major asset manager earlier this year. “I know regulation moves slowly, but I’m still amazed that 15 years after the financial crisis, when European ABS has actually performed well from a credit perspective – the structures are better, the collateral’s better – you’ve still got this very, very punitive capital charge treatment for insurers.”
The asset manager said that the capital requirements were incentivising insurance companies to invest directly in pools of whole mortgage loans rather than RMBS tranches, which is arguably a much riskier investment strategy. De Nederlandsche Bank found in 2020 that mortgage loans had increased as a proportion of Dutch insurance company balance sheets from 5.9% to 12.3% between 2008 and 2019.
In their letter, the industry bodies called for a recalibration of Solvency II capital charges to levels that are proportionate to the commensurate risk. “Without these changes, there is no economic rationale for this industry sector [insurers] to invest, despite the manage advantages that securitisations could offer.”
Synthetics at risk
For banks, meanwhile, the letter drew attention to a range of measures being contemplated by EU policymakers that could effectively kill off the region’s growing synthetic securitisation market.
Synthetic securitisations allow banks to transfer risks associated with loans to outside investors while keeping the loans technically on their balance sheets, which frees up capital to lend to more customers.
Just last year, the EU brought these trades, also known as significant risk transfer transactions, within the scope of its simple, transparent and standardised (STS) framework as a way to encourage their use to support loans to SMEs recovering from the pandemic. The European Investment Fund has meanwhile become a frequent user of the product to channel funds to SMEs across the continent.
But the industry bodies said that some measures being considered by legislators, such as new technical standards, were at odds with this objective and were likely to have the opposite effect, making the vast majority of synthetic securitisations uneconomical.
“At the heart of the problem,” they wrote, “is a disconnect between the Commission’s vision for securitisation in Europe – a tool making a significant contribution to a well-functioning financial system that efficiently finances the real economy – and aspects of the regulatory framework which remain miscalibrated and, in practice, disincentivise issuance and investment in securitisations, thus holding back the tool’s potential to support the economy.”