What is riskier: buying entire mortgages, with the danger that a homeowner defaults, or securities backed by those loans which prioritise the holder with the first repayments?

Securitisation’s role in triggering the financial crisis is coming back to haunt it: Solvency II, Europe’s new insurance regime, risks taking insurers, newly significant buyers of the bonds, out of the market. In other words, products which could help credit-starved Europe are being unreasonably penalised. Regulators are confusing the securitisation industry that helped trigger the credit crunch with the one that exists now. Loan underwriting standards have changed drastically as have the rules around the role of banks in the process.

Yet Solvency II has based the capital that insurers will have to hold for all securitisations on the market volatility of US subprime deals – an asset class that failed spectacularly and now barely exists. It does not make sense to require insurers to hold less capital for the risk of default on raw mortgages – an extremely illiquid asset – than for being exposed to prioritised loan repayments through securitisations.