The European Insurance and Occupational Pensions Authority (EIOPA) has published proposals for the treatment of debt securitisations that would introduce different risk charges for securitisations with higher or lower risk profiles.

The Technical Report on Standard Formula Design and Calibration for Certain Long-Term Investments was prepared to examine whether, in the light of the current economic situation, the capital requirements for certain long-term investments under Solvency II can be reduced without jeopardising the prudential nature of the regime.

EIOPA’s key proposal is to introduce a more granular treatment of securitisations.

Instead of the uniform 7% spread risk charge for AAA-rated securitisations that is currently proposed, EIOPA recommends decreasing the charges for less risky issues to 4.3%, while increasing those for riskier ones to 12.5%.

To identify the less risky securitisations, EIOPA has developed a set of criteria related to the structure of securitisation, the quality of the underlying assets, the underwriting processes and the transparency for investors.

The report also confirms the currently proposed risk charges for a number of investments including private equity, loans to small and medium-sized enterprises and socially responsible investments.

The securitisation recalibration proposal is an extension of a previous EIOPA proposal, from 2011.

The new approach retains the criteria, modified in relation to duration, rating and seniority.

These criteria are complemented by requirements on the structure of the securitisation, the quality of the underlying assets, the underwriting process and the transparency for investors.

Securitisations that meet all these criteria – called Type A securitisations – are expected to have a lower risk profile than those that do not (Type B securitisations).

Some of the criteria are adapted from the eligibility criteria for securitisations the European Central Bank (ECB) uses in its refinancing operations.

However, EIOPA said the more favourable treatment in terms of spread risk charges for qualifying securitisations is only justifiable if there can be a sufficient degree of confidence in their better risk profile.

It is therefore suggesting transitional arrangements to mitigate potential negative effects.

EIOPA said that, during the course of its research, it was confronted with a lack of comprehensive, reliable and publicly available performance data, especially for infrastructure investments.

It said it intends to work on closing these data gaps in co-operation with the relevant parties.

Gabriel Bernardino, chairman at EIOPA, said: “Our analysis has shown that those securitisation 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 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.”