Politics hiding behind the technocrats
Capital requirements ought to be the soft padding that lets the market bounce around without doing any damage. But when they are too high, capital requirements, rather than economics, set the price of a security.
The proposed Solvency II capital charges for securitizations have been close to, or beyond that level. Starting at 7% per year of duration in the first draft, the charge has come down, first to 4.3% and then in the latest draft, to 2.1%.
This still means a 10.5% capital charge for five year senior RMBS notes (an asset class with no realised losses in Europe), but might mean, at last, that securitizations are investable for insurers, unlike the 35% capital charge in the first draft.
But the journey to this point is troubling. The technocrats in the insurance regulator have gone through rounds of impact studies to come up with their numbers (that’s how they knew to make the final charge 2.1%, not 2%).
But this has been totally overridden by politics — the European Commission sent letters, Mario Draghi has made speeches, and now the securitization market must be revived by regulatory fiat, so the charges have been slashed.
The securitization industry, GlobalCapital believes, is an essential part of a well-functioning capital market. But in Europe, it has done extraordinarily well to hitch its star to the politically unassailable project of SME lending, and in doing so, has thoroughly undermined the fiction that capital charges are set by anything other than politics.
Will Europe’s leaders, GlobalCapital wonders, use capital charges to deflate the bubble in SME lending coming in 10 years' time?