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EU policymakers want to make securitisation markets work better, but they are split on one controversial point — should banks buying protection from insurers receive the most favourable capital treatment available?

Extending the simple transparent and standardised (STS) label to SRT deals with unfunded protection providers has been a hot-button issue of the European Union’s proposed securitisation regulation changes.

STS is a label that can be earned by meeting a set of criteria on a securitisation transaction to get better capital treatment. For SRT transactions, the bank-issuer benefits from a better capital treatment on the tranches it retains, making the deals more capital-efficient.

Two of the three main policymaking bodies in the EU have now laid out a version of how they want to see securitisation rules change.

The EU Commission first circulated its proposal for reforming securitisation rules in June, followed by the EU Council’s version of the proposal (on the EU’s securitisation regulation and capital requirements regulation). The European Parliament has not adopted an official position, but we have a draft of proposed amendments from the representative of the Parliament’s finance committee.

Those in favour of extending STS to SRT deals using insurance protection criticised the Commission’s proposal as too restrictive — although it opened the way to allowing STS for insurance-provided protection, it did so with conditions. Only insurers meeting certain requirements would be able to provide protection in a way that allowed issuers to benefit from STS.

By some estimates, no insurers at all met the Commission’s proposed conditions and only two insurers would meet the Council’s criteria.