Paul Tang, rapporteur for the regulation on securitisations, urges the European Commission to ease the charges for insurers investing in simple, transparent and standardised (STS) securitisations, and rules out the introduction of compulsory third-party certification for such products demanded by the industry. He speaks to Hugo Coelho
Eight months after the European Commission put forward its plans to revive the securitisation market in Europe, the legislative proposals are slowly moving through Parliament. Paul Tang, Dutch member of the Socialists and Democrats group and rapporteur for the regulations, talked to Insurance Asset Risk on the aftermath of the first debate on the issue, last week (24 May) in Brussels. He rebuffed calls from the industry to introduce compulsory third-party certification of STS securitisations and urged the Commission to bring forward the amendments to Solvency II.
The European Council settled its position on the STS framework in December, but the European Parliament is lagging well behind. What is holding you back?
The Parliament is a political house, and we have political differences. The left is concerned with the risks of securitisations, while the right cannot wait to revive the market. This implies more difficult and protracted discussions than in the Council, where member states have taken a technocratic approach and a discussion took place behind closed doors.
How far have you come in bridging those differences?
We have just published a working document, which will help bridge the gap between political groups. Securitisations have a legacy and I want to be sure that the lessons of the past have been learned. This is a precondition for us to find a majority in support of this reform. I will produce a draft report by June, and after the summer we will seek to reach compromise on it.
Will you settle your position before year-end?
I hope so.
Tortuous EU policy-making process
The regulation on common rules for securitisation and the framework for simple, transparent and standardised (STS) securitisation were adopted by the European Commission on 30 September. The European Council settled its position in December. The process is still at an early stage in Parliament. The first debate in the Economic and Monetary Affairs Committee took place on 24 May. Rapporteur Paul Tang is expected to table a draft report in June, which will be negotiated between political groups after the summer.
Once the Parliament settles its position, it will enter trilogue negotiations with the Commission and the Council. Unlike directives, regulations are not transposed into national legislation. An agreement between co-legislators is what it takes for the text to become law and be applied across the EU.
The Commission indicated that the STS framework will come into force together with the amendments to the Capital Requirements Regulations and Solvency II. The latter has not been published yet.
In the past, you have made a link between the adoption of the STS regulation and the completion of the banking union, notably the introduction of the deposit guarantee scheme. Have you changed your mind about that?
I would like to see the timing of the two initiatives aligned. It is a problem if there is no progress on the banking union and there is progress on securitisations and the capital markets union. Our objective in the EU is to break the economy's dependence on banks; making sure deposits are guaranteed, and building up the financial sector are two sides of the same coin.
The agreement on deposit guarantee is not expected before the next federal election in Germany, at the end of 2017. Are you willing to bring the STS process to a halt?
That is the option on the table. If the S&D [Progressive Alliance of Socialists and Democrats] thinks that would exert pressure on the Council, we will use it. It might not be possible to secure a precise compromise from the member states, but they may agree on a timeline. I hope we can make some progress before the German elections.
Solvency II amendments
Is the STS reform the solution to revive the securitisations market in Europe?
The Commission blames stigma for the collapse of the market, but I find that explanation far from convincing. Back in 2008, one could argue financial institutions did not understand securitised products, but they understand them perfectly today.
What are the causes behind the botched revival of the securitisations market?
You cannot explain low issuance levels without looking at the constraints on supply and demand. In the current environment, banks probably have better alternatives than securitisations; and if they securitise, it is to access ECB funding. Demand is subdued for a number of reasons. In the case of insurers, I understand Solvency II does not allow them to invest in this asset class. This is why we need to consider the STS framework together with the amendments to the Capital Requirements Regulation (CRR) and to Solvency II. The Commission published the first two together, but did not put forward the amendments to Solvency II. This is the missing piece in the package.
Can you make separate decisions on STS and the Solvency II amendments?
We can, but it will not help to kick start a liquid market for securitisations. I asked the Commission about the amendment, and was told there is no timeline for that. That came as a surprise.
Do you have a view on how the treatment of securitisations under Solvency II should change?
I would just say that the capital charges should be broadly aligned with the charges that apply to other investors.
Third-party certification
Going back to the STS regulations. What are your concerns about the Commission's proposal?
Securitisations: culprit and prey of the financial crisis
Securitisations got themselves a bad name in 2007-2008, as a consequence of the disastrous performance of subprime loans in the US. The stigma effect caused the market to collapse in the aftermath of the crisis. In the past few years, the market has rebounded in the US, but not in the EU. According to the Association for Financial Markets in Europe, the volume of issuance in the EU in 2014 was still 74% lower than in 2008.
There is a problem of lack of information for market participants and supervisors, and that is why we are proposing to create a data repository. This would allow supervisors to know how the market develops, and to identify systemic risks. In addition, the new regime allows too big a role for credit rating agencies. The US has banned external ratings, but the EU is not doing it.
I think another key debate is about risk-retention rules. The Commission proposed a 5% skin-in-the-game requirement for issuers, and the Council has not dared to touch this. Some groups in Parliament would certainly not mind raising the stakes: why not increase it up to 20%? There is also a general concern about financial stability. We don't want a market just for good times, we want a market in bad times too.
| Table 1: European issuance | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Values (billion euros) | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| Placed | 478 | 418 | 106 | 25 | 90 | 89 | 87 | 76 | 78 |
| Retained | 0 | 175 | 713 | 399 | 289 | 287 | 166 | 105 | 138 |
| Total EU | 478 | 594 | 819 | 424 | 379 | 376 | 253 | 180 | 216 |
| EU retention % | 0% | 30% | 87% | 94% | 76% | 76% | 66% | 58% | 64% |
| Total US | 2,456 | 1,254 | 916 | 1,352 | 1,170 | 1,031 | 1,555 | 1,496 | 1,070 |
| Source: Association for Financial Markets in Europe | |||||||||
The insurance industry is lobbying for a relaxation of due diligence requirements, but you seem to be going in the opposite direction. Can you make any concessions on this?
I think the due diligence requirements are essential. Insurers are allowed to hire a third-party to help them in this process, but this will not alter their ultimate responsibility to do due diligence and would not remove their liability.
Even when the investment is done through asset managers?
Insurers must ensure the asset manager is doing the due diligence right... I am really attached to this principle of the responsibility of the investor, and don't want it diluted.
Insurers are also making a case for the introduction of compulsory third-party certification. Have you ruled this out?
I think one of the strengths of the Commission's proposal is that it ensures that the responsibility for adhering to the STS criteria lays with issuers and investors of STS securitisations. I cannot rule out certification, because we don't have a position yet, but judging from the discussions we've had so far, this would not be easily accepted.
Clarifying the criteria
Insurers are concerned about the cliff effect and the impact on capital if asset-backed securities in their portfolio lose the STS-label. Are you open to considering any mitigating measures?
The proposal introduces disclosure requirements and sanctions against non-compliant issuers, hence it offers some protection to investors. But ultimately, the risk you mentioned is part of the risk of doing business. Having said that, there are valid concerns about the clarity of the criteria, and I think there is scope for improvement in this area.
What can you do to make the requirements clearer?
You can try to do it through legislation or secondary legislation. There are downsides: it is hard to do it at the level of primary legislation, and secondary legislation would probably delay the process. It may be possible to set up a process for early birds, whereby market participants and supervisors come together to define standards.