Restrictive regulations have long been blamed for holding back Europe’s market for bundling mortgages, car loans, credit card debt and other types of borrowing into financial products. (Credit: noah9000/Adobe Stock)

(Bloomberg) — The European Commission is considering reducing the capital that insurers must hold against investments in asset-backed securities, part of a broader effort to revive a €1.2 trillion ($1.4 trillion) market that can finance areas like housing, energy and defense.

The reduction would be as much as 40% in some cases, according to a document being discussed with a panel of experts, with the size of the cut depending on the credit rating and whether the transaction complies with a framework for securitizations.

The EU is due to announce plans to overhaul the bloc’s securitization market this month after lengthy discussions with industry players and other stakeholders. In a typical year, about €200 billion of debt is packaged into securities in the region, compared with around €2 trillion in the U.S.

Asset managers such as Apollo Global Management Inc., which owns insurer Athene, asked for a recalibration of the capital charges in a consultation last year.

A commission spokesperson declined to comment.

For securitizations that comply with a framework known as Simple, Transparent and Standardized, or STS, the reduction would be 10% to 30%, depending on the credit rating, according to the document seen by Bloomberg.

For transactions that don’t fall under the STS — typically ones that are privately sold — the capital requirements on new senior tranches would be 60% to 83% of current levels, depending on the credit rating, the document shows.

The current treatment of non-STS securitization is conservative and lacks risk sensitivity, as capital requirements don’t differentiate between senior and non-senior tranches, according to the document. Also, despite low capital requirements on senior STS securitizations, there is no material uptake of insurers’ demand for such securities, the document states.

Restrictive regulations have long been blamed for holding back Europe’s market for bundling mortgages, car loans, credit card debt and other types of borrowing into financial products. Commission officials met Wednesday with an expert group on banking, payments and insurance, focused on bank regulation and supervision, according to its website.

Should the changes be enacted, the capital charges for senior STS tranches would be closer or equivalent to those of corporate or covered bonds, the document shows. Last month, a group of experts discussed potential proposals to make it more appealing for banks to issue and invest in asset-backed securities.

European life insurers hold just 0.33% of their investment assets through securitizations, compared with about 17% for their U.S. counterparts, despite the industries being of a similar size, Apollo wrote in a submission to the European Commission, which disclosed it this year.

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