The Basel III proposals announced at the end of last year would lead to sharp increases in capital requirements for securitisation exposures, particularly for senior high-quality tranches, despite the lack of EU default evidence to support such large changes. All ABS were perceived as too risky due to the US experience in the subprime mortgage markets.
But this regulation is like calibrating the price of flood insurance on the experience of New Orleans for a city like Madrid. Similarly, if adopted the Solvency II framework would prescribe capital charges for insurers of 80% for ABSs with a AA-rating and 42% with a AAA-rating. By contrast, the charges for corporate bonds would be 6% and 5%, respectively.