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.

Of the US and European mortgage-backed deals that existed in July 2007, European bonds have lost just 0.7 per cent from loan defaults, according to Fitch, while US deals have suffered losses of 12 per cent. Put another way, bundles of good-quality mortgages delivered exactly what they promised to investors who bought and held, as insurers do. US securitisations are supported by government guarantees on most home loans. Europe has no such system. Now regulation risks penalising products that can help free up lenders and allow them to make fresh loans. Solvency II is still grinding its way through Brussels. There is just time for changes to be made. This should be revisited.