The capital allocation for regulated investors in a securitisation under CRR and Solvency II is more than the capital required for a holding of the underlying assets. This penalty risk weighting (“non-neutrality”) is justified by Brussels on the basis that securitisations have additional risks for investors – structural legal risks, complexity (causing “model risk”), and “agency risks” (stemming from the investors having less information than the originators about the underlying assets, and due to the involvement of so many parties). The Securitisation Regulation addressed this: STS issues must be simple, transparent, there must be risk retention (to mitigate the agency risk) and so on. Still, even for STS the capital weighting remains non-neutral, and there are doubts whether insurers will be tempted back into the market when they can, and are buying underlying loan assets instead. A securitisation where the pool is made up of EU sovereign bonds is subject to this non-neutrality, made worse because it could not qualify as STS for two reasons: STS excludes securitisations of “transferable securities”; and no single asset can account for more than 1% of the total pool.
The EC’s 24th May proposed regulation would give SBBS the same capital treatment as direct exposures to the central government of a member state. An SBBS must be simple, and in particular:
- The pool must be weighted to reflect (with 5% tolerance) each relevant member state’s contribution to the equity of the ECB (presumably as at the issue date but it doesn’t say this)
- a 70% senior tranche (there is flexibility for junior tranches)
- denominated in EUR
- the underlying bonds must be issued by Eurozone sovereigns
- the issuer must have “full ownership” of the underlying – nothing synthetic.
The EC hopes this might lead to a market in SBBS and promote CMU, combatting the “sovereign-bank nexus” (banks have a bias towards buying their own sovereign’s bonds, and so a sovereign downgrading will hit its own banks’ balance sheets; and a bank’s woes put pressure on its sovereign to bail it out, etc.) and providing a range of macroeconomic benefits (the accompanying, well-written impact assessment has details) whilst avoiding any risk sharing or fiscal mutualisation (which Brussels would prefer but Germany and others strongly oppose). Consequently, this does not seem politically controversial and might be expected to have a fairly smooth ride through the EU legislative process.