OREANDA-NEWS. March 30, 2015. Fitch Ratings is reassessing the risk of a less conservative remedial period for account bank replacement in light of the increased materiality following the evolution of bank regulation.

Account banks in covered bond programmes with a less conservative cure period than the agency's counterparty criteria and which remain un-remedied may lead to a tightening in the 'Discontinuity Cap' (D-Cap) assessment and ultimately may impact covered bond ratings.

Fitch is currently reviewing the D-Cap assessment of all rated covered bond programmes. From its preliminary review of programmes issued under the SPV template, the agency views that programmes with an account bank's remedial period of 30 business days, versus the 30 calendar days outlined in the agency's counterparty criteria can increase the risk of default in the event of the cover pool becoming the sole source of payment. These issues have been identified for covered bond programmes in Australia, Netherlands, New Zealand, and United Kingdom.

Whilst a 30 calendar day remedial period has long been a feature of Fitch's counterparty criteria, given the changes in the regulatory environment for banks, Fitch views the difference between the 30 business days and 30 calendar days remedial period to be more meaningful than previously assumed. In particular, the Basel III liquidity coverage ratio (LCR) requires counterparties to hold liquid assets to cover potential outflows that may occur within 30 calendar days of a three notch downgrade. Fitch is therefore of the opinion that the provisions of the LCR reinforce a key assumption of the counterparty criteria, namely, that upon becoming ineligible, counterparties will have the financial ability to take remedial action (see 'Fitch: Counterparty Criteria Updated; Remedial Timings Unchanged' dated 14 May 2014 at www.fitchratings.com.)

For covered bonds rating analysis, any increased vulnerability to account bank's credit risk would be reflected in the 'Liquidity Gap and Systemic Risk' and 'Asset Segregation' section of Fitch's D-Cap assessment. Fitch considers that the impact to the 'Liquidity Gap and Systemic Risk' is more significant because it influences timely payment on the covered bond upon the switch of the payment to the cover pool. Concerns on the account bank holding the collateralisation amount for privileged swaps would also be reflected in the D-Cap assessment either in the 'Liquidity Gap and Systemic Risk' and/or 'Privileged Derivative' section.

In reaching its decision on the D-cap tightening, Fitch will consider factors supporting a further isolation from the issuer's credit risk, such as an external counterparty unrelated to the issuer banking group, and the materiality of the counterparty exposure at risk. The ultimate rating impact will depend on any cushion between the rating of the issuer and the covered bonds. A cash flow analysis will also be carried out to test whether the OC that Fitch relies upon can withstand the counterparty exposure at risk.

For those programmes identified to have a deficiency in adequately mitigating the account bank risk, Fitch will be in discussions with the issuers over the next 60 days to establish whether the issuer plans to mitigate the counterparty risk and will execute such a plan within a reasonable period.

Fitch will subsequently be reviewing the programmes that issue covered bonds out of the integrated and specialist bank templates.