Solvency II and Basel III will affect demand for senior bank funding, according to Deutsche Bank. XE reports that a research note from the bank says conflicting demands on long-dated debt between the new regulations are likely to affect the market.
Robert Priester, executive director, wholesale and regulatory policy at the European Banking Federation (EBF), said, “On the one hand Basel is asking banks to extend the duration of their funding while on the other, Solvency II is discouraging insurance companies from buying longer-dated debt. We are very keen for any impact assessment study to include the initiatives that are going on outside the banking industry such as Solvency II.”
The Basel III banking regulation requires that banks become less dependant on short-term funding. It also stipulates that capital reserves reflect the type of debt instrument held by banks.
One asset type that is likely to see growing demand is covered bonds. These bonds, which are backed by pools of assets, are considered particularly safe and attractive both to banks and insurers.
The Deutsche Bank note states, “It is clear that covered bonds get a relatively favourable treatment under Solvency II and when combined with the relatively favourable treatment in Basel III, we would expect covered bond issuance to pick up relative to senior [debt], including some substitution of senior [debt] by covered [bonds], on the back of more bank issuance and insurance buying.”
No delay for Solvency II, according to EIOPA
Solvency II is on schedule according to EIOPA but may require a transitional period. The Telegraph reports on industry concerns that the regulation will not be ready for the 2013 deadline.
However, Gabriel Bernadino, chairman of EIOPA, told the Telegraph, “There are still important milestones to come but I don’t think it will be delayed. I think it will be in place by January 2013 but there might be a transitional period after this, which you always need in projects of the size.”
The ABI has been critical of the tight implementation deadline. Peter Vipond, Director of Financial Regulation and Taxation, ABI, said: “Regulators have taken too long in negotiating Solvency II, leaving little room at the end for finalisation and implementation.”
Speaking of the Solvency II capital adequacy requirements, Mr Vipond cautioned, “Some [regulators] have not learnt the lesson from the financial crisis that long-term businesses, such as insurance, should be able to hold assets and liabilities without having to capitalise them as if they will all be sold at short notice.”
XBRL adopted as Solvency II reporting standard
XBRL will be used as the Uniform Format for Solvency II reporting. XBRL International announced on 19 May 2011 that EIOPA has agreed to adopt the Extensible Business Reporting Language (XBRL) format for Solvency II reporting. XBRL is a market-driven, open, and global standard for exchanging business information.
Anthony Fragnito, CPA, CEO of XBRL International, the global standard-setting body responsible for developing and maintaining the XBRL standard, said: “The EIOPA mandate for XBRL in the pension and insurance sector is a critical step toward the transparency and process improvement benefits of XBRL to insurance and risk management, and expands the XBRL footprint across the financial services and capital markets sectors.”
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