Memorandum by Fitch Ratings (LAI 33)
I. Iceland
1.1 Fitch first warned of systemic risk
in the Icelandic banking sector in March 2006. The agency has
expressed similar concerns in numerous pieces of research and
market commentary since then.
1.2 The agency placed the Icelandic banks
on rating watch negative (RWN) on 1 April 2008. RWN notifies
investors that there is a reasonable probability of negative rating
action in the near-term.
1.3 The key factor in the default of the
Icelandic banks was the freezing of the money markets in the wake
of the failure of major US institutions in mid-September, which
effectively switched off the banks' access to interbank funding
in a very short space of time. Fitch was prompt in its downgrades
of the Icelandic banks that it rates once this transpired.
1.4 The following shows the timeline since
March 2006 of research issued by Fitch relating to the Icelandic
banking sector. In addition to these special reports and comments,
Fitch also issued specific research reports on each rated entity.
— 2 March 2006 The Icelandic
Banks: Assessment of Resilience to Systemic Shocks.
"Fitch's view is that Icelandic banks remain
exposed to risks arising from their domestic market. Given the
small size of the Icelandic economy and existing macro-prudential
imbalances, these risks are not negligible and a combination of
simultaneous shocks could put the banks under multiple pressures."
— 15 March 2007 Icelandic
Banks—Holding Out in Volatile Times
"Icelandic banks remain exposed to specific
risks, including macro-imbalances in their domestic market and
a reliance on wholesale funding…"
— 1 Apr 2008 Fitch Puts Three
Icelandic Banks on Rating Watch Negative (Glitnir, Landesbanki,
Kaupthing's A ratings placed on RWN)
"While Fitch believes that the three banks'
liquidity is currently sufficient, diminishing confidence in the
sector has increased the risk of unanticipated calls on liquidity
while severely restricting funding options."
— 9 May 2008 Fitch Takes Ratings
Actions on Three Icelandic Banks (Downgrades Glitnir, Kaupthing
to A-, affirmed Landesbanki at A)
"Fitch believes they remain vulnerable to
the adverse effects of a prolonged market dislocation."…"The
risks of a hard landing for the Icelandic economy have increased."
— 22 May 2008 Iceland and
the Banks: Questions and Answers
"Iceland is poorly placed to ride out a
prolonged bout of global risk aversion …"
"The longer the global credit squeeze endures,
the less adequate banks' liquidity will appear."…"Banks'
liquidity risk promises to be accompanied by heightened credit
risk …"
— 30 Sept 2008 Fitch Downgrades
4 Icelandic Banks (Glitnir to BBB-, LB, Heritable, Kaupthing
to BBB, all on Rating Watch Negative.)
— 7 Oct 2008 Fitch Takes Further
Rating Actions on Icelandic Banks (Glitnir, Landesbanki downgraded
to B, Heritable to BB)
— 8 Oct 2008 Further Downgrades
of Icelandic Banks Following High Financial Instability (Glitnir,
Kaupthing, Landesbanki, Heritable downgraded to D)
II. What is a Rating?
2.1 In its public disclosure (eg, Code of
Conduct, rating definitions, research reports etc) available on
Fitch's website, Fitch consistently and clearly emphasises the
following:
— Fitch's ratings are opinions reflecting
the ability of an entity or a securities issue to meet financial
commitments such as interest, preferred dividends, and repayment
of principal, in accordance with their terms. Ratings are not
themselves facts, and therefore cannot be described as being "accurate"
or "inaccurate".
— Ratings are intended to be used by investors
as an indication of the likelihood of receiving their principal
and interest back in accordance with the terms on which they invested.
However, we expect our ratings to be only one of many factors
that an investor will consider when making an investment, since
the ratings address only one of many factors that would typically
be relevant to such a decision. For example, our ratings do not
deal with the risk of loss due to changes in interest rates and
other market considerations, nor do they comment on the adequacy
of market price, the suitability of any investment, loan or security
for a particular investor (including without limitation, any accounting
and/or regulatory treatment), or the tax-exempt nature or taxability
of payments made in respect of any investment, loan or security.
— Ratings are not a recommendation or suggestion,
directly or indirectly, to buy, sell, make or hold any investment,
loan or security or to undertake any investment strategy with
respect to any investment, loan or security or any issuer.
— Fitch does not provide to any party any
financial advice, or any legal, auditing, accounting, appraisal,
valuation or actuarial services. A rating should not be viewed
as a replacement for such advice or services.
— Ratings are based on information obtained
directly from issuers, other obligors, underwriters, their experts,
and other sources Fitch believes to be reliable. Fitch does not
audit or verify the truth or accuracy of such information, and
has undertaken no obligation to so audit or verify such information
or to perform any other kind of investigative diligence into the
accuracy or completeness of such information. If any such information
should turn out to contain misrepresentations or to be otherwise
misleading, the rating associated with that information may not
be appropriate and Fitch assumes no responsibility for this risk.
— The assignment of a rating to any issuer
or any security should not be viewed as a guarantee of the accuracy,
completeness, or timeliness of the information relied on in connection
with the rating or the results obtained from the use of such information.
22 January 2009
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