OREANDA-NEWS. Set-off risk resulting from the resolution of two of the four failed Italian local banks is minimal in Fitch-rated RMBS deals originated and serviced by those banks, Fitch Ratings says. Very few mortgage borrowers in these deals also held the written-off, subordinated bonds that could give rise to set-off risk.

We rate three RMBS deals originated and serviced by Banca Popolare dell'Etruria e del Lazio (BPEL) and two from Banca delle Marche. The European Commission approved resolution plans for these banks, as well as Cassa di Risparmio della Provincia di Chieti and Cassa Di Risparmio di Ferrara, late last month. Under the plans, equity and subordinated debt issued by the four banks were fully written off, in line with the EU's Bank Recovery and Resolution Directive (BRRD) and state aid rules. Deposits (including those exceeding the protected threshold of EUR100,000) and senior unsecured bonds were not affected.

It is unclear to what extent borrowers will be able to invoke a right to set-off the amounts written off against debts owed to the banks. However, if it were possible, the maximum loss for the Fitch-rated RMBS notes, brought about by the write-off of subordinated bonds, would not exceed 0.3% of the current portfolio balance. This is unlikely to have any rating impact given the small size compared with the current credit enhancement of the notes. The small number of borrowers in these transactions that were also holders of subordinated debt from their lenders limits the potential set-off exposure. Fitch considers that if senior bonds and uninsured deposits had been subject to write-off, it is likely the potential for borrower set-off risk would have been greater.

Prior to resolution, Banca delle Marche was subject to the Bank of Italy's special administration procedure for over two years, while BPEL went into special administration in early 2015. Our transaction monitoring shows that being subject to special administration did not result in any significant underperformance of the associated Fitch-rated RMBS due to either borrower or servicer behaviour. Borrower payment rates and constant prepayment rates were in line with overall trends in the Italian mortgage market and there has not been any anomalous increase in measures of arrears.

Steady loan repayment and arrears rates suggest that healthy borrowers did not opportunistically withhold payments when the banks went into special administration, and that the Bank of Italy-supervised process had no impact on servicing activity, including the servicers' active intervention if borrowers became financially distressed. This is consistent with our discussions with the lenders, which indicate that the Bank of Italy encouraged efforts to make servicing more efficient.

Even though special administration is typically a servicer termination event in Italian securitisations and back-up servicers are already appointed in the transactions originated by BPEL and Banca delle Marche, there has been no servicing disruption. This is why no issuer or trustee has had any servicer replaced so far. Fitch expects servicing arrangements will remain unchanged following resolution.