Insurers putting money into one of private credit’s hottest trends will face fresh oversight from the EU’s financial stability watchdog, under new proposals to bridge the gap between member states on a deal to revamp Europe’s securitization market.
Denmark, which holds the rotating presidency of the European Union, has offered additional checks and balances by the European Systemic Risk Board as a way to address concerns that insurers’ investment in synthetic risk transfers could threaten financial stability. SRTs allow banks to reduce their capital holdings by offloading some of the risks to insurers, who guarantee they will take early losses. The transactions are part of the broader securitization market which allows banks to reduce their risk.
In a document circulated ahead of a meeting this week, the presidency suggested that the ESRB “should monitor macroprudential risks associated with the provision of unfunded credit protection under the STS label.” STS is a category of securitization that is Simple, Transparent and Standardized and so benefits from less onerous regulatory treatment.
The Danish are also proposing a new mandate for the ESRB, which sits at the European Central Bank in Frankfurt, to publish a report 36 months after the planned securitization legislation comes into force. The work should assess “the impact of STS on-balance-sheet securitizations on financial stability, and any potential systemic risks, such as risks created by concentration and inter-connectedness among non-public credit protection sellers.”
The compromise pitch comes against the backdrop of rising concerns about potential risks from the securitization market, which Europe has vowed to nurture as part of its pledge to boost growth. The value of global banks’ synthetic securitizations recently surpassed $670 billion, with European lenders such as Banco Santander SA and Deutsche Bank AG among the top users.
The Copenhagen-based executive is seeking to reach a compromise from the 27 governments so that securitization rules — seen as key to unleash financing for housing, defense and other goals — moves ahead to the next phase of the lengthy EU legal process.
Improving the terms under which insurers can invest in SRTs could also “amplify counterparty risk by deepening existing channels and creating new pathways for contagion,” the ECB said in an opinion about the draft regulation released early this month.
“Concentration risk would be greater because the proposed amendment would give (re)-insurance companies a significant competitive advantage over other private investors,” said Francesco Mazzaferro, head of the ESRB Secretariat, in an Oct. 13 speech at a European Parliament committee.
Photograph: Copenhagen, Denmark; photo credit: Freya Ingrid Morales/Bloomberg
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