##ation tranches is challenging. one solution is to use credit ratings but the shortcomings of that approach were exposed during the crisis. another is to use a regulatory formula capturing dimensions of risk such as the credit quality of the underlying pool, tranche seniority and maturity. in our view, including a differentiation based on stc in that capital calculation helps to capture other important dimensions of risk related to structure, transparency and governance. because one of our objectives is to broaden the investor base, it is important that the stc designation makes things simpler for investors, particularly non - banks. for example, they should be able to place greater reliance on it when conducting their own due diligence on matters covered by the stc criteria, such as risk retention. investors would thus be in a position to concentrate with more confidence on other, existing due diligence requirements, such as in relation to the creditworthiness of the underlying assets and cash flows characteristics. the implementation process for the stc designation is therefore important. in our view, the primary obligation should be on the originator to attest compliance with the criteria. but this needs to be in the context of a regulatory regime with effective supervisory oversight and sanctions. we must also be careful not to label all non - stc transactions as “ bad ”. there should be a continuing place in the market for many transactions that do not qualify for the stc designation, including synthetic transactions, managed portfolios and pools that do not meet the granularity requirements. turning to capital requirements, looking at historical losses on securitisation tranches, we think the calibration of bank capital requirements that the basel committee published in december is broadly right. but there is a case for some lowering of capital requirements for stc transactions on the grounds of lower structure risk. a stronger argument can be made that solvency 2 standardised capital requirements for eu insurers are still too high, especially at longer maturities – although it should be noted that these will not apply to insurers using internal models. for banks and insurers, part of the issue with securitisation capital requirements is the comparison with covered bonds, which tend to be treated favourably in eu regulation. issuers looking to raise secured funding may therefore see covered bonds as a more cost effective alternative to securitisation. covered bonds have a legitimate role in the market as a source of stable long - term funding. but securitisation has the

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