Fitch Introduces Leading Edge Economic Capital Model for Financial Guarantors.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. today unveiled a new, leading-edge economic capital model to support its ratings of financial guarantors. The model, which is called Matrix, will be used to evaluate the capital adequacy of financial guarantors rated globally by Fitch. Matrix, which is a fully stochastic By guesswork; by chance; using or containing random values. stochastic - probabilistic model employing numerous 'next generation' modeling techniques, utilizes Monte Carlo simulation Monte Carlo Simulation A problem solving technique used to approximate the probability of certain outcomes by running multiple trial runs, called simulations, using random variables. to assess the defaults and recoveries, and related correlations, within the portfolio of bonds and securities insured by a financial guarantor. The model also simulates the impact of reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. and soft capital facilities, including reinsurer re·in·sure tr.v. re·in·sured, re·in·sur·ing, re·in·sures To insure again, especially by transferring all or part of the risk in a contract to a new contract with another insurance company. defaults, disputes and collections, all on a fully stochastic basis. Fitch believes Matrix is the only model within the financial guaranty As a verb, to agree to be responsible for the payment of another's debt or the performance of another's duty, liability, or obligation if that person does not perform as he or she is legally obligated to do; to assume the responsibility of a guarantor; to warrant. industry to stochastically assess both portfolio defaults and reinsurance recoveries. Other advancements present in Matrix include recognition of the correlation between default and recovery rates over a full spectrum of good through bad economies; the impact of portfolio concentrations on default rate variability from the perspective of geography, asset class, sector and structured finance servicer; the impact of seasoning on the default experience of structured finance exposures; realistic simulations of recoveries on mezzanine tranches of varying thicknesses; and recognition of varying default risk and recovery levels for like-rated securities within the U.S. municipal markets. Matrix also includes a leading-edge regime shift function to capture the 'risk of the unknown', that represents adverse events that could occur in the future but are not reflected in historical data. The Matrix model builds on existing stochastic methodologies used in modeling bond portfolio defaults and recoveries that have been in place for the past few years within both the financial guaranty sector and structured finance asset classes, including collateralized debt obligations Collateralized Debt Obligation (CDO) A general inclusive term which covers Collateralized Bond Obligations, Collateralized Loan Obligations, and Collateralized Mortgage Obligations, (CDOs). Matrix replaces the factor-based capital assessment model Fitch used previously in the financial guaranty industry. Critical among the reasons for the model are the changes to the industry. Over the past decade, the types of credits insured by financial guarantors have migrated from primarily being very low-risk U.S. municipal finance to products that have taken on more complexity or specialization, including global structured finance and more recently international project finance. 'Fitch believes that Matrix represents a major step forward in the context of third-party assessment of capital adequacy in the global financial guaranty industry,' said Thomas Abruzzo, Managing Director, Fitch Ratings. 'Matrix provides Fitch and the financial guaranty industry with a more accurate and detailed assessment of capital adequacy than has been, or is currently, available in the marketplace from other third-party observers. This should allow Fitch to be the industry leader with respect to the veracity veracity (v  ras´itē),n of our ratings, and our abilities to prospectively identify favorable or unfavorable trends in a financial guarantor's capital position.' Though Matrix has become the primary tool used by Fitch to assess capital adequacy in the financial guaranty industry, Fitch's broader analysis of capital adequacy continues to incorporate traditional leverage measures, a review of regulatory minimum capital requirements Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. , as well as a review of a financial guarantor's in-house capital models. Matrix is becoming effective today within Fitch's ratings assessments in the financial guaranty industry. This introduction follows an extensive Beta testing (programming) beta testing - Testing a pre-release (potentially unreliable) version of a piece of software by making it available to selected users. This term derives from early 1960s terminology for product cycle checkpoints, first used at IBM but later standard throughout the period during the second half of 2006. Fitch developed Matrix over an approximate two-year period with consultant Milliman, one of the leading actuarial firms in the world. This Criteria Report, 'The Fitch Matrix Financial Guaranty Capital Model' may be found on the agency's web site www.fitchratings.com. Related Reports and Events: In addition to this report, for a more detailed discussion of company results under Matrix, see the associated Special Report 'Financial Guarantors - Initial Matrix Capital Model Results' and related press release, dated Jan. 9, 2007. For additional information concerning Matrix's rating guidelines and methodology, see 'Rating Guidelines for Financial Guarantors'. Fitch also will hold a webcast and teleconference on Wednesday, Jan. 10, 2007 at 10:30am ET. More details on the webcast to follow in a separate press statement. All materials are available on www.fitchratings.com. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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