OREANDA-NEWS. Fitch Ratings has published two Exposure Drafts in respect of its Global Bank Rating Criteria and Global Non-Bank Financial Institutions (NBFI) Rating Criteria.

Fitch's rating frameworks for banks and non-bank financial institutions have remained broadly consistent over time, with only moderate refinements introduced occasionally to reflect changing market circumstances. These exposure drafts are largely consistent with the current Global Bank Rating Criteria and the current Global Non-Bank Financial Institutions Rating Criteria in terms of substance, and Fitch does not expect the conversion of these exposure drafts into final criteria (if finalised as drafted) to result directly and immediately in any rating changes.

"Fitch is committed to rigorous and forward-looking credit analysis. We're maintaining a consistent rating framework because our approach has proven itself over several decades. The refinements we are proposing reflect reasonable responses to the evolving regulatory landscapes for FIs around the globe," said David Weinfurter, Fitch's Global Group Head for Financial Institutions.

Proposed key changes to the current criteria are listed below:
Financial Metrics: Fitch has clarified how it uses financial metrics in its assessment of a bank or NBFI's financial profile. A core metric is identified for each of the four financial profile factors that form part of Fitch's Viability Rating (for banks) or standalone assessment analysis (for NBFIs). 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 for banks) and adding others (eg, the liquidity coverage ratio for banks).

Derivative Counterparty Ratings (DCR): The Bank Master Criteria Exposure Draft outlines proposals to assign DCRs to some banks. 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 IDR. Notching up is possible when derivative counterparties benefit from legal seniority over a sufficiently large and sustainable buffer of other senior liabilities.

Equity Credit and Fitch Eligible Capital: The Global Bank Master Criteria Exposure Draft outlines proposals to no longer formally assign equity credit to a bank's hybrid capital instruments, nor to calculate a bank's Fitch eligible capital (which was defined as Fitch Core Capital (FCC) plus equity credit assigned to hybrids). 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 exposure drafts its approach to assessing corporate governance in banks and NBFIs. Accordingly, the exposure drafts no longer incorporate 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.

Criteria Consolidation: The NBFI exposure draft proposes to consolidate Fitch's Financial Market Infrastructure Criteria and Mortgage Real Estate Investment Trust (REIT) Criteria, both of which are currently standalone sub-sector criteria underneath the NBFI criteria. The consolidation is presentational in nature only, and does not alter Fitch's analytical approaches to such entities.

In addition, Fitch has provided greater clarification on i) its approach to notching and ii) support, where parent banks' IDRs are notched up from their VRs and where the source of support is a sister entity.

Fitch invites feedback from market participants on the proposed criteria. Comments should be sent to FIcriteria@fitchratings.com by 20 May 2016. Fitch will apply the existing criteria to existing ratings and the criteria described in this exposure drafts to new issuer/transaction rating assignments during the exposure draft period. Fitch will publish on its website any written responses it receives, in full, including names and addresses of such respondents, unless the response is clearly marked as confidential by the respondent.