13 October 2014
The European Commission (EC) has adopted prudential rules for banks and insurers to stimulate investment in the economy.
The rules adopted come under the Solvency II Directive and the Capital Requirements Regulation, which will help promote high quality securitisation, ensure that banks have sufficient liquid assets in testing circumstances and introduce international comparability to leverage ratios.
According to the EC, this package is part of the ongoing calibration of the regulatory framework to ensure that it enables the financial sector to effectively support the real economy, without jeopardising financial stability.
The acts adopted today include detailed rules to implement the Solvency II Directive, particularly concerning: the valuation of assets and liabilities, including the so-called 'long-term guarantee measures'; how to set the level of capital and calibrate various asset classes an insurer may invest in; and how insurance companies should be managed and governed.
Simplified methods and exemptions apply in some cases to make the application of Solvency II easier, in particular for smaller insurers.
A detailed liquidity coverage requirement for banks has also been adopted, which consists of a requirement that banks should hold enough high quality liquid assets to cover the difference between the expected outflows and inflows over a 30-day stressed period.
Clarification of the leverage ratio has also been taken on board, which sets out details for banking institutions across the EU on how to apply the existing rules on the leverage ratio in a uniform manner.
The Solvency II and Liquidity Coverage Ratio delegated acts establish a risk-sensitive prudential treatment for banks and insurance undertakings acting as investors in securitisations. A more favourable treatment applies to highly transparent, simple and sound securitisation instruments with a view to supporting investment in Europe's economy, according to the EC.
Solvency II, a new framework for insurance and reinsurance firms in the EU, will apply from 1 January 2016. Solvency II also aims to ensure that the rules do not present any unnecessary obstacles to insurance and reinsurance firms investing in the European economy with a long term focus, creating sustainable, inclusive, resource-efficient and job-creating growth in Europe.
European Head of Solvency II at KPMG, Peter Ott, commented: ‘This is the most important missing piece of the puzzle. Although there is still scope for change during the review process, we have finally reached the position that every insurer in Europe will now have the same draft, ending months of secrecy and confusion.’
Janine Hawes, insurance regulatory leader at KPMG, added: ‘The revised rules aim to better reflect the underlying risks, taking account of the seniority of the tranche and the quality of the underlying assets. For senior tranches, the charges are now more aligned to the charges that would apply were the underlying loans held directly.
‘This move will help allay concerns that high capital charges could deter insurers from investing in longer-term investments, which is much needed to enable European growth and create jobs. However, insurers choosing to invest in these assets will still need to be able to demonstrate that they meet the prudent person principles, including the ability to properly identify, measure, monitor, manage, control and report the underlying risks.’