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
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
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