Wednesday, December 1, 2010

Fitch as a fiddle II

The Age via Bloomberg reports this morning that:
Australia's banks and insurers would find the fallout following a 30 per cent tumble in house prices ''manageable'', Fitch Ratings said yesterday, as it released partial results of a stress test.

Whilst this blogger is reassured that Fitch has passed the mortgage complex, it might have been useful for the report to supply some context. For instance from this blog six weeks ago:
The Fitch stress test is a simple credit risk assessment for the big banks' mortgage portfolios. That is, Fitch asked what would the losses be for the banks in the event of three housing bust scenarios, one mild, one medium and one severe.

The test is a straight three year model without econometrics.

It makes no reference to any macroeconomic scenario.

Nor does it take account of losses in other areas of the banks' greater portfolio of consumer and business loans.

Nor does it take account of the liability side of the banks' balance sheets and the liquidity risk buried in their wholesale borrowings.

In short, the test is the functional equivalent of judging the safety of an aircraft by jumping up and down on its wings. If they hold, we're cleared for takeoff. The coughing engine, missing tail and dead pilot get ignored.

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