Participants in the European securitisation industry have expressed confusion and frustration about the treatment of their sector since the financial crisis, including elements of insurance regulation that appeared at first to start from the premise that all securitisation is bad.
More recently, politicians have turned from blaming securitisation for the crisis to seeing it as a tool to reinvigorate the region’s economy – a way to help small- and medium-sized companies raise funds from the capital markets, with banks acting as agencies in the process.
But the rules have not yet caught up. Thus European policy-makers find themselves in the awkward position of promoting a mechanism that is undermined by some of their own rules.
Capital charges on all but the highest-quality asset-backed securities (ABSs) under Solvency II are an established focus of industry opprobrium, but there are other contentious points too. For example, risk retention rules that require bank issuers of ABSs to stay invested – to keep ‘skin in the game’ – could mean European insurers holding US legacy assets that don’t qualify will be forced to dump assets.
Meanwhile, confusion hangs over the multi-trillion dollar US agency mortgage-backed securities market, where investors are uncertain how to treat bonds that don’t appear to count as securitisations under the European rules. Convincing arguments exist that agency bonds should carry a lower risk weighting than corporate bonds, but whether that will be the case in practice remains uncertain.
Firms that are struggling to keep up with the rules could justifiably point out that the rules are not keeping up with the politicians.
Meanwhile, in our coverage this month, we look at how the possibility of interest rate rises is causing insurers concern. German insurers are the most exposed in Europe to long-term low yields, because of the guarantees that have been common across the industry. And yet a recent paper from the Deutsche Bundesbank warns about the danger of lapse risk if rates climb by just 2%.
The longer rates remain low, the more business insurers write that is vulnerable to such an increase.
So, in addition to protecting themselves against rates staying low, firms are starting to think about how to protect against lapse risk when circumstances change. One option is to run a duration gap, but that raises the question of how wide such a gap should be. A second response comes in the form of product innovation - switching away from the guaranteed products that are the source of so much of German insurers' difficulties.