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Fitch: Covered Bond Harmonisation Plans Do Not Tackle FX Risk
June 14, 2017 / 10:53 AM / 6 months ago

Fitch: Covered Bond Harmonisation Plans Do Not Tackle FX Risk

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Covered Bond Harmonisation Proposals Miss the Chance to Address FX Risk here FRANKFURT/LONDON, June 14 (Fitch) Preparatory work on harmonising European covered bond regimes does not address the fact that most national frameworks would not fully protect covered bond investors from exchange-rate volatility, Fitch Ratings says. Addressing foreign-exchange (FX) risk completely via regulation or legislation is challenging, but we believe the move towards European harmonisation presents a opportunity to examine how best to do so. The European Commission said on 8 June that it would draft a legislative proposal for an EU covered bond framework to be introduced next year, following reports by the European Banking Association and European Parliament's Committee on Economic and Monetary Affairs. These reports acknowledge the potential risk from FX exposures, but do not make detailed recommendations on how to mitigate FX risk, beyond regular stress-testing. FX risk can arise in European covered bond programmes with open foreign-currency positions between assets and liabilities, or where cover assets are backed by security in a country with a different currency. Measures to address FX risk vary widely from country to country. Germany's Pfandbrief Act, for example, says that issuers should conduct weekly FX stress tests and publish open positions in their quarterly reporting. It also attempts to limit FX risk through its 2% minimum overcollateralisation (OC) requirement. This approach provides some transparency for investors, but the currency stresses that the Act specifies for calculating the 2% OC requirement are lower than those that Fitch uses to assess the impact of FX movements in our investment-grade rating scenarios, and do not reflect potential FX market volatility at times of stress, in our view. In practice, issuers of Pfandbriefe rated by Fitch hold OC sufficiently above the 2% minimum to meet the breakeven OC for the relevant rating. Fitch's breakeven OC for the rating of covered bond programmes exposed to open-currency positions is substantially higher than for programmes that are not. We consider FX risk a residual rather than a primary risk when the currency mismatches between assets and liabilities or within the cover pool are below thresholds set out in our criteria. Our report, "Covered Bond Harmonisation Proposals May Miss the Chance to Address FX Risk" is available at www.fitchratings.com or by clicking on the link. Contact: Vessela Krmnicek, CFA Director, Covered Bonds +49 69 768 076 298 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 D-60311 Frankfurt am Main Rebecca Holter Senior Director, Covered Bonds +49 69 768 076 261 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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