CMBS Designation Under the Solvency II Directive
The European Insurance and Occupational Pensions Authority (EIOPA) classifies assets into two categories: The Type A category of assets includes consumer-related products such as residential mortgages, auto loans/leases and SME loans. The Type B Category of assets includes most other products including CMBS, trade receivable ABS, CDO/CLOs and whole business.
Two trade bodies – The Commercial Real Estate Finance Council (CREFC) and the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) are advocating for the designation of some CMBS products as Type A based on their characteristics. Type B assets are subject to higher capital charges than Type A assets (12.5 percent compared to 7 percent).
The trade bodies argue that allowing some CMBS to qualify as Type A would promote diversification on two levels: First, in the investment portfolio of insurers, where CMBS has different characteristics from other forms of exposure to commercial real estate and CRE-related debt; Second, it would help develop the commercial real estate finance market, which has historically been too reliant on banks. Grouping all CMBS into one category and imposing a securitization penalty ignores economic reality and may distort capital allocation and investment decisions, according to CREFC and INREV.
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EIOPA did not qualify CMBS as a Type A asset under the Solvency II Directive because of the product’s poor performance and higher spread volatility. Their position is that even though it may be possible to identify a small segment of CMBS that is more stable, the evidence is insufficient and the process too complicated to merit separating CMBS between the two categories.
Source: Reuters
Last Updated on January 26, 2014 by Ramin Seddiq