Jan 23 (The following statement was released by the rating agency)
Fitch Ratings has reviewed its criteria for stressing interest rate risk in covered bonds and structured finance transactions and amended the stresses applicable to Euribor, UK pound Libor and New Zealand interbank rates. The changes concern the parameters applicable to the three rates, but core principles of the criteria remain unchanged.
In particular, the equilibrium rate assumptions for the three rates have been lowered to reflect Fitcha€™s view on long-term growth potential and target inflation in the respective countries. In addition, the agencya€™s mildest long-term stress of a€˜Bsfa€™ for Euribor and UK pound Libor has been lowered, in line with the equilibrium rate decrease, while the a€˜AAAsfa€™ long-term stress is unchanged. This is because while the updated long-term expectations supporting the equilibrium rate assumptions result in a revision of the agencya€™s mildest stress (Bsf), they do not represent a fundamental macroeconomic shift that renders the a€˜AAAsfa€™ stresses inadequate.
Similarly, the short-term stresses have been kept constant at high rating levels, while the a€˜Bsfa€™ short-term stress has been reduced in line with a lower equilibrium rate. The change reflects the agencya€™s view that its mildest interest rate stresses (Bsf) should account for reduced volatility risk.
Fitch does not expect any rating changes to result from the implementation of the update.
a€œAlthough the current low and stable interest rate environment represents a significant deviation from historical trends, we believe that in the long run rates will normalise in line with our equilibrium rate assumptions as the global economy returns to growth,a€� says Michele Cuneo, Senior Director at Fitcha€™s Structured Finance team. a€œThe decision to keep the stresses applicable to high rating levels substantially unaltered reflects also the uncertain outcome and timing of a turn in current monetary policiesa€�.
The criteria update also includes stress parameters for Polish Zloty Wibor, which are published together with the parameters applicable to other interest rates in the spreadsheet "Fitch's Interest Rate Stress Assumptions for Structured Finance" dated 22 January 2014, available at www.fitchratings.com The criteria outline Fitcha€™s methodology for analysing the vulnerability of structured finance transactions and covered bonds to interest rate changes. The framework combines both short-term and long-term considerations and provides for upwards and downwards stressed interest rate movements for different rating stresses.
Fitch has also completed an updated review of the interest rate stresses and calibration parameters applicable to each short-term market interest rate (i.e. Libor or currency-specific equivalents). The process included an analysis of historical rate movements, a review of the economic outlook and monetary policy regimes of each country, and an evaluation of the resultant levels of stress produced by applying the interest rate criteria.
The updated criteria report "Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds" and accompanying spreadsheet are available at www.fitchratings.com.
Link to Fitch Ratings' Report: Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds