The European Insurance and Occupational Pensions Authority has responded to a request from the European Commission by proposing changes that would reduce the capital adequacy requirements of certain long-term investments.
EIOPA's key proposal involves more granular treatment of securitised products. Rather than the current 7 percent uniform risk charge for AAA-rated securitisations, EIOPA recommends a reduction for the less risky securitisations to 4.3 percent.
It did however recommend an increase to riskier ones to 12.5 percent.
EIOPA also published guidance on identifying riskier securitisations based on their structure, the quality of underlying assets, the underwriting processes and the level of transparency to investors.
Also included in the proposal are changes to the proposed risk charges for loans to small and medium businesses, residential mortgages, consumer finance and leasing.
Gabriel Bernardino, chairman of EIOPA, said in a statement : “Our analysis has shown that those securitization issues meeting a set of quality criteria have a good track record of performance and from a supervisory perspective should meet lower capital requirements. We are confident that the new classification of debt securitisation allows for a better alignment between risk and capital management and, therefore, can support the long term growth objectives in a prudent way”.
The report can be accessed HERE.