Fitch Ratings says that the proposed new Solvency II regulation for European insurance companies in respect of their exposure to securitisations could discourage insurance companies from investing in highly rated and historically strongly performing securitisations.
Fitch says that the new measures, set to come into force at the beginning of 2014, could lead to disproportionately high capital charges, and in the process, restrict funding opportunities for European banks.
The proposed capital charges for securitisations are a multiple of both existing charges and those for other asset classes such as covered bonds and corporate bonds, so insurers using the standard formula will be incentivised to invest in these asset classes in preference to securitisations.
The proposed capital charges are also a multiple of the proposed Basel III capital charges for banks, largely because they are reflective of the volatility of credit spreads rather than probability of default. Under the new rules insurers, who typically would seek to hold long dated assets to match their long dated liabilities, would be incentivised to buy shorter dated assets with lower market price volatility.
“The investor base for European securitisations has been severely diminished since the onset of the global credit crisis,” says Ian Linnell, Fitch’s Global Head of Credit Ratings. “However, over the past 18 months or so there has been a gradual return of ‘real’ investors to the securitisation market. Insurers and pension funds are an important part of that investor base. If Solvency II is implemented in its current form and if, as is expected, similar regulation for pension funds follows, the recovery of the market could be put in jeopardy, with negative implications for the supply of credit and ultimately the recovery of the European economy.”