Bangkok--18 Feb--Fitch Ratings
Fitch Ratings has today updated its criteria for stressing interest rate risk with respect to existing and new structured finance transactions. The updated methodology is applicable to all structured finance asset classes globally and the principles also apply to global covered bonds' ratings. The report provides calibration parameters for Euribor, USD Libor and GBP Libor, which have been published with further detail in an accompanying Excel file.
The interest rate stress criteria provide a framework to test the direct sensitivity of structured finance transactions to given ranges of possible upward and downward interest rate movements. The stresses do not represent forecasts or expectations and are intended to be used only to analyse cash flows in transactions where interest rate movements are not one of the primary risk drivers. For transactions identified as having a high degree of sensitivity to interest rate movements, for example those deals with significant unhedged positions, Fitch will continue to apply bespoke stress assumptions.
The new methodology delivers transparent and intuitive upward and downward interest rate stress scenarios, starting from the prevailing spot rate. It is calibrated for different rating levels and takes into account historical interest rate movements as well as forward-looking long term macroeconomic considerations. The interest rate stresses are responsive to the spot interest rate movements in lower rating scenarios while being relatively stable for higher rating levels.
The updated interest rate stresses are applicable to new and existing transactions. Relative to the previous interest rate stress criteria, which were derived from a low interest rate regime using market data, the new methodology applies moderately higher stresses in increasing rate scenarios. However, as most Fitch-rated structured finance transactions have only limited exposure to interest rate movements, no rating changes are expected to result directly from this criteria update.
The criteria report "Criteria for Interest Rate Stresses in Structured Finance Transactions" and the accompanying spreadsheet "Fitch's Interest Rate Stress Assumptions for Structured Finance" are available at www.fitchratings.com. The publications replace the following reports:
"Interest Rate Risk In Structured Finance Transactions - Euribor", dated 1 November, 2006.
"Fitch EURIBOR Stresses", dated 11 November 2009.
"Interest Rate Risk In Structured Finance Transactions: USD LIBOR", dated 1 November, 2006.
"Fitch USD LIBOR Stresses", dated 31 July, 2009.
"Interest Rate Risk In Structured Finance Transactions: British Pound Sterling", dated 1 November, 2006.
"Fitch GBP LIBOR Stresses", dated 11 November, 2009.
Fitch will broaden the application of the framework in coming months to additional major interest rate bases. This will be announced through separate comments and will be accompanied with an updated spreadsheet.
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