Solvency II Capital Calibration for Securitisations

Paper available here.

Non-technical summary available here.

William Perraudin, Yixin Qiu, Jozsef Kutas

A significant obstacle to the revival of the European securitisation market is the high level of capital that insurers are required to hold against securitisation positions under Solvency II rules. This paper presents evidence on how securitisation capital for insurers should be calibrated. We analyse a large dataset of price data on individual tranches, construct return indices and measure the Value at Risk of different securitisation portfolios. We also analyse capital from a bottom up perspective, allocating Solvency II capital for asset pools to securitisation tranches using the Simplified Supervisory Formula Approach (SSFA) employed in the Basel III rules. We conclude that Solvency II capital charges for AAA-rated Type 1 tranches are double what the evidence suggests is appropriate. Charges for Type 2 tranches are also much higher than is justified by the data.