Solvency II risks damaging the recovery of the European securitisation market and further undermining the ability of banks to lend, according to the credit ratings agency Fitch.
Solvency II sets out rules for how much capital insurers have to hold against various assets depending on their risk and duration.
In a new report, Fitch estimates that up to a fifth of new issues are bought by insurance firms and warns “punitive” capital charges against securitisations could push insurers towards other sorts of assets.
Fitch global head of credit ratings Ian Linnell says: “The securitisation market in Europe died off post-2007. Pre-crisis it was worth around £500bn a year, that fell to almost nothing in 2010 and it is now back at around £120bn. This will pull the rug out from under that recovery.”
The report says: “Banks that use securitisations could see the availability of funding for their retail SME assets decrease significantly at a time when they are under pressure to support these sectors while at the same time reducing leverage.”
Under Solvency II firms will be able to use a standard formula for working out capital requirements, or use their own internal models which have been approved by local regulators. Fitch says the standard formula is out of step with the actual risk securities pose in a portfolio of investments and risks making smaller firms less competitive.
The report says Solvency II requires a 42 per cent capital charge for a AAA securitisation security with a duration of six years or more. This compares to estimated total losses of just 4.4 per cent on Fitch’s global AAA securitisation portfolio.
Linnell says: “Firms that can afford to use internal models are likely to come up with substantially lower estimates for the capital they have to hold against them, possibly as much as one tenth of the standardised approach. That disadvantages smaller firms who will be stuck with the standard approach and have to hold more than larger firms.”