PCS filed its response to EIOPA’s disappointing consultation on a possible reform of the capital requirements for insurance companies investing in securitisations.

The response may be found here.

The consultation was, in our view, a major disappointment. EIOPA’s preliminary conclusions – underlined by their statements at a public roundtable attended by PCS – were that the current framework was “fit for purpose”.

For all the reasons set out in our response, PCS feels that this is not borne out by the facts and that the assertion itself as set out in EIOPA’s consultation document feels more like an “act of faith” than a genuinely reasoned conclusion.

We hope that the responses provided by stakeholders will lead EIOPA to reconsider the importance of fixing a framework that is unfair, inaccurate, and deeply damaging to the prospects of the European economy as well as a source of potentially destabilising regulatory arbitrage.

We have previously referred to the issue of capital calibration for securitisations purchased by insurance undertaking as the "Cinderella issue".  Of all the issues on which the European Commission  has asked the ESA's to provide advice, it is both the least noticed and yet, in our view, the most important of the unfinished reforms begun with the passing of the Securitisation Regulation.

Today, insurance companies are holding a minuscule percentage of securitisations in their books - just above 2%.  Their holdings of high quality STS securitisations are in homeopathic amounts at around 0.05%.  Yet, if we are to see a revival of a securitisation market in Europe that mobilises non-bank savings to fund the economy, the return of insurance companies is essential.

Yesterday, EIOPA, as part of gathering evidence for its report to the commission, issued a consultation (here)

PCS welcomes this consultation and urges all concerned stakeholders to participate.  We note though with some disappointment the very short period in which the market is asked to respond .  The deadline for responses is 13 July. Less than four weeks in the summer months for a consultation likely to be heavy on data that needs to be gathered and marshalled seems unnecessarily challenging.

Following the publications by the European Banking Authority of their report to the Commission regarding the definition of high quality liquid assets and by the Basel Committee of its new consultation on the capital weightings for bank holdings of securitisation, EIOPA published on December 19th its report on capital requirements for insurance companies under Solvency II.  This last document (to be found here)  represents a very mixed result for securitisation.  On the one hand, following a request from the European Commission to revisit it original proposals, EIOPA has sought - in the new document - to define a category of "high quality securitisation".  This is the first attempt to perform this vital step to reach a logical and fair regulatory outcome.  Broadly speaking, PCS approves of the resultant definition.  However, the capital requirement numbers that EIOPA then proposes for this new category are very high indeed.  High enough to kill any real possibility of insurance companies purchasing any securitisations.  This, in turn, will have a devastating effect on the attempts to rebalance the European financial architecture toward a greater capital market component.  It is also, in our view, the result of a flawed methodology that unfairly penalises high quality securitisations against other asset classes and does not treat "like-for-like".  With the EBA and Basel Committee reports not focusing on any definition of high quality securitisation and using the same flawed methodology, this trilogy of proposals omens very poorly for the hopes of a revival of securitisation as a funding channel.  Those who have a stake in such a revival, whether as lenders, borrowers and anyone interested in the future of finance in Europe now have their work cut out for them for 2014.