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Proposals for European SRT labelled ‘relentlessly positive’ for small banks and insurers
by Nathan Tipping
Europe’s significant risk transfer market could be transformed under sweeping European Commission proposals that aim to rewire the continent’s strict securitisation framework.
The proposed amendments to the EU Securitisation Regulation are “fairly relentlessly positive” for European SRT, said Robert Bradbury, head of SRT at consultancy firm Alvarez & Marsal, “albeit adding some complexity”.
Small banks could become frequent SRT issuers, and insurers may become more active in writing credit protection under the proposals, which were published last month.
While some aspects, such as the changes to definitions of public and private securitisation, have been poorly received, the proposed changes to rules impacting SRT have been largely welcomed. “It’s a big positive, particularly on the capital reduction side, with some qualifications,” said Neil Hamilton, partner at Mayer Brown.
The proposals are good news for banks looking to gain capital relief through SRT transactions as they would lower the capital charges they face when holding assets in securitised form. Small and mid-sized banks and many so-called ‘national champions’ tend to use the Basel banking framework’s standardised approach. This means they generally face higher capital charges than global systemically important banks using the internal ratings-based (IRB) approach.
The changes could lead to a 10-15% improvement for the average simple, transparent and standardised (STS) corporate SRT for IRB banks, said Bradbury.
It’s a big positive, particularly on the capital reduction side
Neil Hamilton
Partner
Mayer Brown
In addition, the changes could make a “huge difference” for banks using the standardised approach, said Bradbury. The capital benefit of doing an STS SRT in these cases can more than double, depending on the portfolio. And banks shouldering higher risk-weight floors would enjoy a relatively larger capital benefit from SRT.
Insurers will also benefit if the proposals come into effect. A long-standing regulatory wrinkle that has stymied insurers’ participation in a popular kind of SRT transaction would be removed under the Commission’s plans.
“The proposals are very helpful in bringing insurers into the space,” said Salim Nathoo, partner at A&O Shearman.
European insurers have long been precluded from participating in SRT deals that are both unfunded — meaning the insurer does not have to stump up collateral to the issuing bank — and STS. That’s because it is costly for insurers to do funded transactions, as they must first source collateral from third-party banks through so-called ‘repacks’.
At the same time, issuing banks prefer SRT trades with the STS label because they receive more capital relief.
Insurers make up less than 15% of the SRT investor base in Europe, according to a report from the European Banking Authority. But some won’t be eligible to participate in unfunded STS SRT deals. The proposals apply to multiline insurers using an internal model to calculate capital requirements, with total assets of at least EUR 20bn. They must also be regulated under Solvency II and have a minimum credit rating of around triple B.
Insurers will also be unlikely to benefit from a new label laid out in the proposals. Securitisations labelled ‘resilient’ and meeting a prescriptive list of criteria would allow some banks and certain investors to benefit from lower capital charges. But insurers participating in SRT transactions will not be eligible.
If insurers were able to participate in ‘resilient’ deals this could potentially make insurance capital so attractive for issuing banks that it might help build up a concentration of exposures in the insurance system, said Jeremy Hermant, SRT lead at advisor Alantra.
But with insurance capital being so attractive anyway, Bradbury wonders if banks will bother issuing resilient transactions at all.
