Fitch: Feedback Report on Amendments to Covered Bond Criteria from Bank Resolution Developments

(The following statement was released by the rating agency)

Link to Fitch Ratings' Report: Feedback Report: Covered Bond Rating Criteria 
Change

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738918

PARIS/BARCELONA, March 10 (Fitch) Fitch Ratings has published feedback, 
including non-confidential submissions, received in respect of the agency's 
consultation on "Exposure Draft: Impact on Covered Bond Rating Criteria from 
Developments in Bank Resolution Frameworks". The feedback is contained in a 
report, which also explains the final changes made to Fitch's Covered Bonds 
Rating Criteria after the exposure period (see "Fitch Amends Covered Bonds 
Rating Criteria on Bank Resolution Developments") and provides clarifications on 
some issues raised by market participants. This report follows a period of 
public consultation which concluded on 31 January 2014.

Fitch would like to thank market participants for their comments on its exposure 
draft. The agency received eight written submissions, three of which requested 
confidentiality. Respondents included two industry associations replying on 
behalf of members, four issuers and two investors. Most respondents agreed that 
covered bonds' exemption from bail-in supported expanding the differentiation 
between a bank's senior unsecured debt rating and its covered bond rating. 

Compared with the initial proposal, Fitch has modified one of the three factors 
considered in the determination of the applicable uplift above an Issuer Default 
Rating (IDR). In the agency's final criteria, covered bond programmes qualify 
for a potential IDR uplift if the outstanding level of senior unsecured debt 
represents at least 5% of total adjusted assets (adjusted for derivatives and 
insurance assets). This replaces an initially proposed threshold set as an 
amount equivalent to common equity plus junior debt and subject to a minimum 
threshold of 10% of total adjusted assets. 

Fitch believes that the 5% threshold provides a meaningful protection against 
financial shocks, serving as a significant buffer if equity and other junior 
instruments prove insufficient to restore  viability to a failing bank. It is 
also a reasonable proxy for minimum total capital/risk-weighted assets that a 
bank is likely to be required to maintain under Basel III in most jurisdictions. 


The other two factors considered for determining the applicable IDR uplift were 
adopted into Fitch's final criteria as outlined in the exposure draft. These two 
factors are as follows: (1) Fitch's opinion regarding the relative ease of - and 
motivations for - resolution methods other than liquidation; and (2) the 
importance of covered bonds to the financial markets in a given jurisdiction. 
Further details on how Fitch will assess these two aspects are also provided in 
the feedback report.

In the feedback report, Fitch also notes that the final compromise Bank Recovery 
and Resolution Directive (BRRD) text published by the European Council on 18 
December 2013 implies that covered bonds issued by non-deposit taking 
specialised mortgage credit institutions could bear losses in the event of a 
resolution. Unless their exemption from bail-in is ultimately affirmed on 
finalisation of the BRRD or when it is transposed into national law, the 
affected programmes will not benefit from the IDR uplift. This applies to 
certain covered bonds issued from Denmark. 

For more information, see "Covered Bonds Rating Criteria" and "Feedback Report: 
Covered Bond Raing Criteria Change - Developments in Bank Resolution Frameworks 
Beneficial", available at www.fitchratings.com. 

Contacts:

Carmen Munoz

Senior Director 

+34 93 323 8408

Fitch Ratings Espana, S.A.U.

Paseo de Gracia, 85, 7th Floor

08008 Barcelona 

Helene Heberlein

Managing Director

+33 1 44 29 9129 

Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, 
Email: christian.giesen@fitchratings.com.

Additional information is available at www.fitchratings.com. 

Related Research:

"Feedback Report: Covered Bond Rating Criteria Change - Developments in Bank 
Resolution Frameworks Beneficial" (March 2014)

Applicable Criteria and Related Research: 

Covered Bonds Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738975

2014 Outlook: Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725396

Impact of European Banking Union on Banks - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710703

The Evolving Dynamics of Support for Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715000

Bank Support: Likely Rating Paths

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715001

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