Fitch Ratings has introduced a new quantitative tool aimed at enhancing its analysis of bank regulatory capital adequacy. The new risk data and calculation tool ("risk calculator") reflects the advance in industry use of risk-based capital models that has been supported by the introduction of the Basel II capital framework.

The risk calculator facilitates the collection of improved bank risk exposure data in a standardized format. It enables Fitch to determine regulatory capital at individual asset class and aggregated levels, evaluate risk exposures by estimating risk weights and analyse underlying risk parameters - probability of default (PD) loss given default, exposure at default, maturity and risk-weighted analysis - at asset class level. The systematic collection of relevant data will enable Fitch to perform peer analysis of risk parameters, identify patterns or trends in risk profile, compare capital requirements across Basel II approaches and estimate the effect of stressed economic conditions through sensitivity analysis of individual risk parameters.

"Assessing the sufficiency and quality of risk-based capital is an important part of Fitch's overall bank rating process." says Fitch Managing Director Gordon Scott. "The risk calculator provides a capability to complement Fitch's fundamental analytical judgment with a quantitative framework."

The major Scandinavian banks were early adopters of Basel II, and their participation in the testing phase of Fitch's risk calculator has enabled Fitch to evaluate its risk calculator against a broadly comparable peer group. The resulting Case Study released today is based on risk data provided by those participating banks as at end-Q108 and illustrates the approach Fitch will take to collecting and analysing risk data and capital ratio calculations.

Fitch expects to refine the risk calculator during the remainder of 2009 and aims to roll it out to a larger number of banks in 2010. As more data are collected Fitch expects to be able to benchmark specific risk estimates across multiple asset classes and different peer groups. As additional information is gathered and results are evaluated, Fitch expects to publish regular supporting research in line with its commitment to provide relevant and timely commentary on central industry topics.