Recognizing the vulnerability of many financial institutions to sudden changes in market dynamics and counterparty behavior and the inherent challenges in using traditional analysis for liquidity assessment, Fitch Ratings has begun testing a new quantitative tool aimed at enhancing its analysis of the critical elements of an institution's liquidity profile.
The tool will be used to perform sensitivity analysis tailored to each financial institution's profile. Benefits will include the ability to standardize key liquidity information, aggregate data across countries and perform meaningful peer analysis across a large percentage of Fitch's rated universe of banks, securities firms and other financial services companies. The resultant data will assist Fitch in maintaining its commitment to provide relevant and timely research on central industry topics.
The tool is designed to evaluate an institution's liquidity under a variety of entity specific and general market scenarios. Since this can be a challenging exercise even in stable environments, the framework is designed to overlay the quantitative results with analytical judgment, while maintaining Fitch's commitment to consistency and comparability. "These types of tools are aimed at aiding our understanding of how an institution manages a liquidity disruption and necessarily requires analytical judgment," said Fitch Managing Director Gordon Scott.
Fitch anticipates that the analysis of the scenario results will demonstrate how well placed an institution is to cope with an unexpected loss of liquidity should one arise. Intuitively, this process will highlight institutions with higher reliance on relatively more confidence sensitive borrowings such as capital markets or non-core deposits. "As experience has shown, liquidity availability can change very rapidly during periods of market stress," said Fitch Managing Director Christopher Wolfe.
Fitch expects that the test phase of the new tool will last through the remainder of the year as additional information is gathered from Fitch's rated financial institutions and results are evaluated. At the end of this process, Fitch expects to publish a detailed methodology and supporting research.