February 1, 2017 / 5:24 PM / 2 years ago

Securitisation needs Solvency II 'game changer'

LONDON, Feb 1 (IFR) - Securitisation advocates are turning their lobbying efforts to the European Union’s Solvency II directive, as they attempt to unlock an insurance investor base that could transform the market.

The European Parliament, Commission and Council began their ‘trialogue’ talks on EU securitisation regulations last month.

But many market participants believe the main element of the package they are discussing - a framework for Simple, Transparent and Standardised (STS) securitisations proposed by the Commission - will fall short of what is needed to revive the market, and whatever is agreed will be in place by 2018 at the earliest.

Publicly-syndicated European ABS supply was just under 100bn in 2016. One ABS structuring specialist said that “while the composition of that supply will change, I cannot see the total number being materially different in the next few years.”

Bankers report that private use of securitisation for capital relief has been relatively active this year, but public supply has been patchy as the economics of ABS structures remain unfavourable.

Italy’s Veneto Banca retained some 1.6bn of RMBS notes last week, in one example of securitisation’s inability to compete with cheaper funding alternatives on offer from the European Central Bank.

“Taking this package of proposed regulations together and incorporating some of the further proposals, we doubt whether these new rules will create a fertile ground on which the market could develop further,” said Rabobank analysts in a note on Tuesday.

They believe the package could even be harmful in the short term, as arbitrage-driven deals, “which form a considerable part of today’s market”, could become less economical to sell, particularly due to a proposed hike in risk retention.

BRIGHTER FUTURE?

The next battleground for ABS proponents is insurance regulation, namely Solvency II.

ABS syndicate bankers look enviously at the proportion of SSA and corporate bond transactions that are allocated to insurers, which are locked out of securitisations by punitive capital requirements under the EU directive.

“In some cases, if their mandates would allow it, it would be less punitive for an insurance investor to buy a raw portfolio of mortgages than to buy an backed by those same mortgages,” said the ABS structurer.

The European Commission has said it will review the capital charges once the new securitisation regulation framework is in place now being discussed is in place.

Solvency II could be “the main game changer” for the ABS market in the next few years, according to Rabobank’s analysts.

“Currently, capital charges in this regulatory framework for insurers are too high in our view, even for high-quality securitisations,” they said.

“If they lower the capital charges for STS securitisations, it might become more attractive for insurance companies to re-enter the securitisation market, and the future of the asset class might become much brighter than it currently is.” (Reporting by Tom Porter, editing by Robert Smith and Alex Chambers)

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