European regulators should take a "second look" at the capital charges imposed on investments through securitisations under Solvency II, said Jacques Larosière, president of the Eurofi, an influential think-tank.
In a keynote speech at the European Insurance and Occupational Pensions Authority (Eiopa) on 19 November Larosière, the father of the European Systemic Risk Board, denounced the different capital treatment of senior and junior tranches.
According to Larosière, this distinction gives rise to regulatory arbitrage and makes notes hard to market to all but unregulated companies.
His remarks come less than two months after the European Commission adopted the Solvency II delegated acts, where the risk charges on investments are defined.
The so-called level 2 text builds on Eiopa's recommendation to split securitisation notes into two groups and apply lower charges to senior tranches of higher quality securitisation notes.
The charges for senior tranches are capped at 3%, but the minimum level of capital required for junior tranches remained at punitive levels. BBB-rated tranches can attract a charge as high as 19.7% per year of duration.
Larosière criticised regulators for basing the calibrations on the assumption that insurers are exposed to market price volatility. "This is not true", he noted, "as their business model allows insurers to reduce significantly or even fully avoid exposure to forced sales."
The former governor of the Bank of France called on the Commission to better align the charges with loss expectations, as opposed to pay heed to the position – senior or junior – in the waterfall of the tranches.
The European Parliament and the European Council have the power to veto the Solvency II delegated acts, but they are not expected to do so. The text is set to come into force on 10 January and the charges will apply from 2016.