Many of the proposals outlined in the EU’s Capital Markets Union (CMU) have certainly been well-meaning, but not all of them have succeeded in achieving the initiative’s stated objective of facilitating more non-bank lending within member states. The Simple, Transparent and Standardised Securitisation Regulation (STS) is designed to provide an uplift to the European securitisation market, a sector which remains distinctly moribund with issuances at levels well below their pre-crisis peak of more than 400 billion euros.
Attendees at the ABS Global Conference 2018 in Barcelona have applauded the EU’s STS initiative but they temper this enthusiasm with some realism, acknowledging that securitisation issuances are unlikely to increase dramatically as a result of the rules. Steve Gandy, managing director and head of private debt mobilisation at Santander Global Corporate Banking, highlighted the criteria for securitisations to acquire STS status totalled more than 80 individual requirements, some of which were rather loosely defined.
Some advances have been made though, most notably marrying up STS Regulation with Solvency II. Solvency II subjects insurance companies to risk-weighted capital requirements which are correlated to the nature of their underlying investments. Under previous Solvency II iterations, asset backed securitisations (ABS) carried punitive capital charges, but these have since been eased for STS transactions making it less onerous for insurance companies to hold positions in such instruments.
While the rule-changes have been welcomed in some quarters, the Association for Financial Markets in Europe (AFME) said they did not go far enough. In a consultation letter, AFME said the treatment and calibrations of non-senior STS tranches remained disproportionately high, before stating that it was disappointed no reference had been made by the European Commission to the treatment of non-STS securitisations such as collateralised loan obligations (CLOs) and commercial mortgage backed securities (CMBS), which continue to retain high charges under Solvency II.
The AFME letter added that while senior STS tranches and short maturity mezzanine tranches may benefit from some increased investment by insurers following the new provisions, the overall results were likely to be subdued. Insurers, AFME said, tended not to purchase senior or AAA rated securitisations as they were short-dated and the yields were too low. Instead, insurers preferred instruments towards the lower end of the investment grade spectrum. As such, insurers are unlikely to transition en masse towards securitisations because of STS unless more changes are introduced.