The European securitisation saga
The treatment of securitisations in Europe has gained some publicity recently with updates coming from the European Commission (EC) and the European Insurance and Occupational Pensions Authority (EIOPA) on Solvency II. In this article we review the changes and provide additional comments on our interpretation of the regulatory requirements of holding such assets on the balance sheet of an insurance firm.
Background
Asset-backed securities (ABS) have been used by investors to gain exposure to groupings of what would otherwise be highly illiquid and inaccessible assets. The underlying assets come in a variety of forms from auto loans to credit cards and from residential to commercial mortgages.
For the end investor, the pooling mechanism coupled with the credit enhancement (through tranching, overcollateralisation and insurance wraps) was seen as an attractive risk-return proposition. However, during the financial crisis, in many instances the instruments did not deliver on this potential. As a result, the market capitalisation of European ABS is now approximately $1.8 trillion in size, down from the 2009 high of $3.1 trillion and back to 2007 levels (see Figure 1).
