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Fitch Publishes Proposed Consolidated & Updated FI Rating Criteria
December 17, 2014 / 12:16 PM / 3 years ago

Fitch Publishes Proposed Consolidated & Updated FI Rating Criteria

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Global Bank Rating Criteria here LONDON, December 17 (Fitch) Fitch Ratings has published three separate, related exposure drafts of rating criteria reports for its global financial institutions (FI) group. Fitch welcomes comments from market participants on the three exposure drafts: 'Global Bank Rating Criteria,' 'Global Non-Bank Financial Institutions Rating Criteria,' and 'Financial Market Infrastructure Company Rating Criteria' The changes reflected in the proposed updated criteria are primarily a function of consolidating a variety of current sector- or topic-specific rating criteria into two consolidated global master rating criteria - one for banks and one for non-bank financial institutions (NBFIs). As the proposed Financial Market Infrastructure (FMI) criteria is a new sub-sector criteria, Fitch intends to have it function on a standalone basis for about one year and then intends to embed it in the NBFI criteria. There are a few refinements to substance, but the primary proposed changes are structural and presentational, aimed at further enhancing the clarity and transparency of Fitch's financial institutions rating framework. As such, Fitch does not anticipate any immediate or direct rating changes arising as a result of adopting the proposed bank, NBFI and FMI criteria. "Fitch's rating framework for financial institutions has clearly demonstrated its credibility and resilience over the last few decades. As such we are comfortable with maintaining the core of our rating approach," said David Weinfurter, Fitch's global group head for financial institutions. The refinements we have introduced build upon the historical fundamental credit performance of our ratings portfolio and also reflect recent and anticipated developments in bank resolution regimes and banks' capital and funding structures, such as the introduction of total loss absorbing capacity." "Fitch is mindful of the fatigue that some market participants may feel with respect to the seemingly regular release of proposed regulatory rules, accounting treatments, and rating methodologies. We believe that the consistency of our FI framework, a simplified criteria hierarchy, and no anticipated rating actions arising solely from the revised criteria will be welcomed by the market," said Weinfurter. Fitch reviews its rating criteria annually, in line with its policies and procedures and with applicable regulations. GLOBAL BANK RATING CRITERIA The proposed consolidated bank rating criteria is largely consistent with the current Global Financial Institutions master rating criteria released earlier this year (31 January 2014). However, the proposed criteria also now incorporates five previously separate standalone cross-sector FI criteria: 'Rating FI Subsidiaries and Holding Companies' (10 August 2012), 'Ratings FIs Above the Sovereign' (11 December 2012), 'Banking Structures Backed by Mutual Support Mechanisms' (18 December 2013), 'Assessing and Rating Bank Subordinated and Hybrid Securities' (31 January 2014),' and 'Recovery Ratings for Financial Institutions' (September 24, 2013). Following adoption of the final updated criteria, these five standalone criteria reports will be retired. In terms of substance, the primary changes include (i) clarifications on when Fitch might rate a bank's Long-term Issuer Default Rating (IDR) above its Viability Rating (VR) because of protection offered to senior creditors by loss absorbing junior instruments; (ii) a refinement of our approach to assigning Recovery Ratings to senior unsecured debt issues of lowly-rated banks; and (iii) some moderate changes to our methodology for assessing institutional (shareholder) support for banks. Fitch does not anticipate any direct or immediate rating changes as a result of adopting the revised criteria. However, as we gain additional clarity on the nature, extent and timing of expected changes to bank capital and funding structures arising from recent total loss absorbing capacity (TLAC) proposals, we will begin to reflect those dynamics in rating actions. GLOBAL NON-BANK FINANCIAL INSTITUTIONS RATING CRITERIA The proposed consolidated NBFI rating criteria has been created to serve as a sister rating criteria to the bank master criteria. Although new, it primarily reflects a consolidation of three current sub-sector NBFI criteria: 'Securities Firms Criteria' (31 January 2014), 'Investment Manager and Alternative Funds Criteria' (12 December 2013), and 'Finance and Leasing Companies Criteria' (11 December 2012). It also includes the NBFI-specific aspects of the financial institution cross-sector criteria noted above. In terms of substance, the criteria report is divided into sections covering the four major NBFI sub-sectors: securities firms, investment managers, business development companies and finance and leasing companies (including policy institutions). The primary change is the addition of enhanced clarity on key rating factors by rating category for each of the four sub-sectors, which is consistent with the Rating Navigator frameworks and similar to what has already been introduced for banks. The criteria also includes an expanded recovery rating framework which contemplates both liquidation value (akin to banks) and going concern value (akin to corporates) when determining recovery prospects for NBFI issuers rated 'B+' or below. FINANCIAL MARKET INFRASTRUCTURE COMPANY RATING CRITERIA The proposed FMI companies criteria is a new, sub-sector rating criteria that reflects Fitch's analytic approach for rating exchanges, clearinghouses and central security depositories (CSDs). While these types of entities were previously rated under Fitch's Securities Firm criteria, Fitch believes market structure developments will reinforce the relevance of more specific issuer and issue rating criteria for such institutions. The proposed criteria evaluate FMIs based on their operating environment, company profile, management and strategy, risk appetite and financial profile. For exchanges, the quantitative analysis is largely based on cash flow metrics and capital expenditure, given the limited balance sheet risk undertaken and the need for continual technology investment to support trading and avoid operational issues. For clearinghouses, the analysis also considers the sufficiency of counterparty risk management via membership, margining and sizing of guaranty funds. For CSDs, customer and collateral management is the primary focus. COMMENT PERIOD The proposed rating criteria are being released as exposure drafts. Market participants wishing to provide comments may do so in writing at ficriteria@fitchratings.com. All comments received will be made public by Fitch unless the respondent expressly requests confidentiality in writing when providing their comments. Comments must be received by 30 January 2015. Following the comment period Fitch will assess comments received, update the proposed criteria (if warranted), and then release the final revised criteria in 1Q15. Contact: David Weinfurter Managing Director, Financial Institutions +44 20 3530 1505 Fitch Ratings Limited 30 North Colonnade London E14 5GN James Watson Managing Director, Financial Institutions +7 495 956 6657 Nathan Flanders Managing Director, Financial Institutions +1 212 908 0827 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable Criteria and Related Research: Global Non-Bank Financial Institutions Rating Criteria here Financial Market Infrastructure Company Rating Criteria here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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