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Fitch Ratings: Covered Bonds' Breakeven OC to Benefit from New Commingling Approach.

Milan/London: Breakeven overcollateralisation (OC) for the ratings of some covered bond programmes will benefit from Fitch Ratings' new approach to commingling risk. We estimate this will be limited to potentially nine covered bond programmes of the 110 programmes we rate and OC is expected to decline on average by around 2% for them.

However, there will be no rating impact because about 92% of the covered bond programmes are at their maximum achievable rating and commingling risk is not a rating constraint.

For four of the nine programmes, Fitch will stop sizing commingling losses in the breakeven OC for the rating because the risk has become immaterial or a secondary risk driver and the rating of the respective issuer is high enough to support the covered bonds' rating. For the other five programmes, the risk has become immaterial but issuers continue to deduct the potential commingling amount in the asset coverage test.

For an additional 15 covered bond programmes, we now classify commingling exposure as a secondary risk driver, which reduces the point at which the programme's breakeven OC for the rating could rise. For the remaining programmes rated by Fitch, there are no changes to how we view the materiality of the commingling exposure.

The re-assessment of commingling risk is captured in the updated Structured Finance and Covered Bonds Counterparty Criteria (dated 1 August 2018 at Based on our observation of recent bank failures, commingling losses are very unlikely to materialise and we believe the commingling risk has reduced. As such, Fitch now classifies commingling exposures as a key risk driver, secondary risk driver or immaterial, based on the length of the exposure. The classification as secondary risk driver leads to reduced eligibility thresholds applied to collection account banks and collection account bank holders.

We classify commingling risk for Italian covered bond programmes as immaterial given that all of them have contractual provisions that prescribe collections are transferred to the programme account bank within two business days from receipt. The commingling risk for all German programmes and three Dutch programmes is now considered a secondary risk driver. For three German programmes and one Dutch programme, the ratings of the respective issuers are high enough (at least 'BBB') to support the current covered bonds rating without sizing for commingling risk. For French residential mortgage covered bond programmes, we now consider commingling risk a secondary risk driver due to their monthly reporting frequency.

All the programmes from the cited countries benefit from adequate protection for payment interruption risk upon a loss of the collected funds, since all of them have mechanisms in place that provide at least three months of liquidity to cover timely payment of senior expenses, net swap payments and interests.

When commingling risk is not mitigated by the issuer's rating and no other mitigants are present, we factor in a commingling loss when calculating breakeven OC for the rating. No losses are sized when mitigants exists for some programmes (i.e. most of the Italian and French programmes), such as the presence of commingling reserve or the deduction of the potential commingling amount in the asset coverage test.

Fitch will proceed with the re-assessment of the commingling risk and the implementation of the new methodology within six months of the publication of the new criteria.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jan 15, 2019
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