Fitch Finalizes Global Bank Rating Criteria Following Market Consultation
The finalization of the criteria report has not resulted directly and immediately in any rating changes. Fitch would like to thank market participants for their input.
Key changes to the criteria are as follows:
Financial Metrics: Fitch has clarified how it uses financial metrics in its assessment of a bank's financial profile. A core metric has been identified for each of the four financial profile factors that form part of Fitch's Viability Rating (VR) for banks. Fitch determines an implied factor score from reported core metrics. Implied scores can then be adjusted to arrive at final scores based on several considerations, some of which use complementary financial metrics. Fitch has made changes to some of the financial ratios it uses in its assessment of a bank's financial profile, removing some ratios (eg, Fitch Eligible Capital/Risk Weighted Assets), adding others (eg, the Liquidity Coverage Ratio) and making minor adjustments to others.
Derivative Counterparty Ratings (DCR): Fitch has introduced DCRs and expects to assign them to selected banks globally in the fourth quarter of 2016 (4Q16). DCRs express Fitch's opinion on a bank's relative vulnerability to default on derivative contracts with third-party, non-government counterparties. A DCR can be equalised with, or notched up from, a bank's Long-Term Issuer Default Rating (IDR). Notching up is possible when derivative counterparties benefit from legal seniority over a sufficiently large and sustainable buffer of other liabilities.
Equity Credit and Fitch Eligible Capital: Fitch no longer assigns equity credit to a bank's hybrid capital instruments, nor calculates Fitch Eligible Capital. This is because FCC is Fitch's primary measure of a bank's capitalisation, and the agency believes it can consider the extent to which a bank's non-core capital strengthens its ability to absorb losses prior to becoming non-viable without formally assigning equity credit to hybrid instruments.
Corporate Governance: Fitch has fully incorporated in the final criteria report its approach to assessing corporate governance in banks. Accordingly, the final criteria report no longer incorporates by reference the separate cross-sector criteria report, 'Evaluating Corporate Governance'. Fitch's approach to assessing corporate governance has remained largely unchanged, and continues to focus on supervisory board effectiveness, financial reporting and related party transactions.
Institutional Support: Fitch's approach to assessing institutional (shareholder) support remains largely unchanged. However, the final criteria report provides clarifications on support from (i) parent banks whose IDRs are notched up from their VRs; and (ii) sister entities.
In finalizing the bank criteria, Fitch made a small number of changes to the content of the bank exposure draft, including i) changes to the definition of 'qualifying junior debt' (QJD); ii) an amendment to enable DCRs and deposit ratings to be more than one notch above a bank's IDR when the IDRs are in the 'B' range or lower; iii) an amendment to enable the DCR of a same jurisdiction subsidiary bank whose IDR is aligned with its parent's IDR due to operational integration to be above its IDR; iv) re-naming the 'Fitch Core Capital/Risk Weighted Assets' ratio to 'Fitch Core Capital/FCC-adjusted Risk-Weighted Assets' to clarify that reported risk weighted assets may be reduced where equity interests in insurance companies or securitizations are deducted from FCC; and v) a minor amendment to one of the 'Funding and Liquidity' complementary metrics.
Fitch has published a Special Report titled 'Feedback Report: Global Bank Criteria', which summarizes the written responses received on the exposure draft and Fitch's responses to this feedback.
Fitch reviews its rating criteria annually, in line with its policies and procedures and with applicable regulations.
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