Association for Financial Markets in Europe
Briefing Paper
AFME Securitisation: Solvency II
October 2017
AFME welcomes the progress now being made to revisit the current Solvency II calibrations for the risk
factors for investment by insurance companies in securitisations. This is particularly timely now that the
regulations setting out a revised Securitisation Framework are being finalised. These harmonise existing
sectoral legislation and create a new framework for “simple transparent and standardised” or “STS”
securitisation, and adjust bank capital requirements to reflect these changes.
Reviving Europe’s securitisation markets is a key pillar of Capital Markets Union (“CMU”). It has been widely
acknowledged that if securitisation is to play a meaningful role in CMU, by reducing reliance on Europe’s
banks and increasing reliance on Europe’s capital markets, it must provide not just direct funding but also
risk transfer, particularly for bank originators.
It is therefore essential for non-bank investors, such as insurance companies or asset managers investing on
their behalf, to return to the securitisation market – particularly for investment in mezzanine and
subordinated tranches. Many insurers left when the current – heavily prohibitive - calibrations came into
effect. A revived securitisation market that relies only on bank investors, without participation by non-
banks, will not deliver the full benefits of CMU and will be less financially stable.
Key components for rebuilding the market
There is now much evidence which shows that the credit and liquidity performance of most European
securitisation through and since the crisis has been excellent: this can be seen from the data collected over
the last ten years since the financial crisis. In addition, considerable additional regulation has been put in
place over this period addressing
inter alia alignment of interest, ensuring “skin in the game” and
comprehensive disclosure, and reducing reliance on credit ratings - culminating in the new securitisation
framework described above.
Prudential safeguards around European securitisation are already stronger than they ever have been and
will be stronger still with the implementation of the STS framework. The key policy objective today must
therefore be to make it attractive for insurers to return to the European securitisation market.
For this to happen the following adjustments to the existing regime are key:
•
Relative, as well as absolute, risk factors are critical: insurance company investors have a choice
of different asset classes in which they can invest. If they are to return to the European
securitisation market, then the applicable risk factors should be set no higher than either those for
bonds that have displayed similar levels of performance during the stress period of the sovereign
crisis (such as covered or corporate bonds), or (where relevant, for example for residential
mortgages) investment in “whole loan pools”.
Association for Financial Markets in Europe London Office: 39th Floor, 25 Canada Square, London E14 5LQ, United Kingdom T: +44 (0)20 3828 2700
Brussels Office: Rue de la Loi 82, 1040 Brussels, Belgium T: +32 (0)2 788 3971
Frankfurt Office: Skyper Villa, Taunusanlage 1, 60329 Frankfurt am Main, Germany T: +49 (0)69 5050 60590
www.afme.eu
•
Any “non-neutrality” premium should be reasonable, and deliver the above policy
objective: the concept of a “non-neutrality” premium on capital for investment in the same assets
after securitisation (compared with before) is present in the bank regulatory capital regime. To the
extent it also forms part of the Solvency II regime, it should be set at a level which is lower than for
banks: otherwise insurance companies simply will not return to the market.
•
The current calibrations are much too high: this has been widely acknowledged. However, it is
key that reductions in risk factors are made not just for senior tranches but also for subordinated
tranches
. Indeed, insurance company investors have a particularly important role to play at the
mezzanine and junior level – this is where they can perform the function of absorbing risk from the
banking system. It is therefore key that risk factors for subordinated tranches, particularly at the A /
BBB rating level, are set at realistic levels. These are the most common ratings for subordinated
tranches in European securitisation and if securitisation is to recover its function as a risk transfer
tool it must be competitive for insurance companies to invest at these ratings. Current risk factor
proposals for subordinated tranches remain extremely high in both absolute and relative terms.
•
Cliff effects should be avoided: overly conservative calibrations can create significant cliff effects
between:
o senior and non-senior
o different credit ratings, with progression down the credit spectrum
o between securitisation and “whole loan pool” investment, and
o between STS and non-STS
The table below illustrates how significant the cliff effects are in the current Solvency II regime:
•
Non-STS securitisations are also key: risk factors for non-STS securitisations should also be
revised. Non-STS securitisation products such as commercial mortgage-backed securities (“CMBS”)
and collateralised loan obligations (“CLOs”) remain important and useful contributors to European
economic growth; it is vital that investment in non-STS transactions remains viable. It is not under
the current risk factor framework.
A more balanced possible approach
One example of a more balanced approach to the calibration of the risk factors is presented in the table
below, adjusted for the various securitisation categories under Solvency II where Type 1 is equivalent to STS
and Type 2 is equivalent to non-STS. The example calibration is based on the existing risk factors for both
covered bonds (for senior STS) and corporate bonds (for non-senior STS and, with a shift of one credit
quality step, for non-STS).
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Transitional and grandfathering measures
Clearly, the new calibrations will derive from the new STS regime but simply referring across to bank
regulation may be problematic. For example, a link to the requirements set out in Article 243 of the revised
CRR could suggest that the
same additional criteria will be required of insurers as they are of banks.
The requirements under Article 243 (such as, inter alia, determination of risk weights of the underlying
exposures) are derived from, and closely linked to, broader CRR concepts and matters that insurers are
unlikely to be familiar with. Insurance companies, with their own regulatory regime, may have a difficulty
integrating requirements designed for banks into their systems.
Rather than adopting a copy-paste approach from the CRR, appropriate additional metrics that are directly
relevant for insurance undertakings should be used for Solvency II purposes.
Next steps
AFME has also undertaken a survey of insurance company investors to ascertain the factors which influence
their decisions to invest, and the results of this are attached.
AFME Contacts
Richard Hopkin
Anna Bak
xxxxxxx.xxxxxx@xxxx.xx
xxxx.xxx@xxxx.xx
+44 20 3828 2716
+ 44 20 3828 8673
Published
October 2017
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Association for Financial Markets in Europe
Solvency II Investor Survey Results – survey undertaken in September 2017
As the EU Securitisation Regulation and amendments to the CRR are being finalised, and given the
acknowledgement that the insurance regulatory framework for securitisation should be compatible with the
Securitisation Regulation, attention is turning to the revision of the current Solvency II calibrations for the risk
factors for investment by insurance companies in securitisation. AFME welcomes the progress being made in
this respect. In order to provide the views of the insurance investor community on the current treatment
under Solvency II and the basis upon which investors would be prepared to invest in securitisation going
forward, AFME conducted a survey of 33 buy side firms. The largest number of the respondents comprised
insurance companies (49%), with a significant number of asset managers1 (39%) and a small proportion
classified as ‘Other’ (12%). A large majority of the insurance company respondents were based in the EU27
(80%), with a smaller proportion based in the UK (20%). The asset managers were mainly operating globally
(56%) and in the EU excluding the UK (39%), with a small number operating in the EU including the UK (5%).
The key findings of the survey are:
•
45% of respondents have either stopped investment or reduced investment in European
securitisation, whereas only 15% have increased investment.
•
Of those respondents that have stopped or reduced investment, by far the largest number say
that this decision was due to the high Solvency II capital charges for securitisation.
•
79% of respondents not planning to invest in STS transactions with the current charges, would
invest if the charges were reduced to equivalence with corporate bonds.
Summary of survey results
•
45% of respondents have either stopped investment or reduced investment in European
securitisation, whereas only 15% have increased investment. This supports evidence from BAML (see
Annex 1), that insurance companies have reduced their investment allocation to European securitisation
in recent years.
1 Asset managers were asked to respond to the questionnaire on behalf of their insurance sector clients.
Association for Financial Markets in Europe London Office: 39th Floor, 25 Canada Square, London E14 5LQ, United Kingdom T: +44 (0)20 3828 2700
Brussels Office: Rue de la Loi 82, 1040 Brussels, Belgium T: +32 (0)2 788 3971
Frankfurt Office: Skyper Villa, Taunusanlage 1, 60329 Frankfurt am Main, Germany T: +49 (0)69 5050 60590
www.afme.eu
• Of those respondents that have
stopped or reduced investment, by far the largest number say that this
decision was
due to the high Solvency II capital charges for securitisation. The administrative
burden of investing in securitisation has also played a significant role in the reduction of insurer
investment in the asset class.
• Of those respondents
not currently planning to invest in STS transactions with the current capital
charges,
79% would invest if the charges were reduced to equivalence with corporate bonds. A
further 7% would invest if the capital charges were reduced to the level of covered bonds.
• Of those
investors that have withdrawn from the European securitisation market, or have never
invested in it,
72% of respondents said that they would invest if the STS capital charges were
equivalent with corporate bonds, and a further 21% if equivalent with covered bonds.
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• Of the respondents currently investing in securitisation, the majority are
most likely to purchase
tranches rated AA-BBB. This indicates that investor interest will be focused outside the senior STS
category in the Solvency II regulations, as tranches rated AA-BBB are highly likely to be either non-
senior STS or part of non-STS transactions.
All Survey responses
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Annex 1 – BAML data on insurance company asset allocation
BAML’s insurance equity research team provided data on the portfolios of the 27 largest listed insurers in the
EU between 2011 and 2016. The data shows that in this period, the allocation of assets to securitisation
(‘Structured Finance’ or ‘Structured’ in the below charts) has dropped from 5% to 3% of total fixed income
holdings.
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