Financial Services Regulatory Authority of Frankfurt Intensifies Company Problem Identification via Traffic Light System
Financial Services Regulatory Authority of Frankfurt has finally decided to embrace a new device to detect companies that are undergoing problems via traffic light model.
- (1888PressRelease) May 06, 2011 - The system will be used by Financial Services Regulatory Authority of Frankfurt in identifying at an early state of the companies that are having problems in the event that properties and equities prices or interest rates stridently change. The Traffic light model has been used by other regulatory bodies in its efforts to help the business industry remains strong.
The traffic light model has been recently distributed to gather significant comments and the business sector's responses have helped in creating specific adjustments to the original proposal such as the following:
• Companies will be offered with the probability of utilizing another risk-free interest rate for assessment of accountabilities than the government bond rate only. This modification does not necessarily affect to the decision about the use of traffic light model however it represents the information that concerns the occupational pension rules that are normally being published.
• An open and definite connected hypothesis between Swedish real interest rate and euro interest rate is determined in this model with correlation estimated to be at 0.5.
• In determining risk of interest rates, the companies will automatically apply all interest rates modification in the same direction.
• The flow in the credit risk situation is concentrated from 50 to 25 base points.
With the traffic light model, the potentiality of using another liability assessment rate is being afforded to keep away from a falsely low government bond rate which results to a rarely high liability assessment. This could happen if the demand for extended government bonds is much bigger that the supply that the rate could be seen as unnaturally decreased. On the other hand, the companies need to show that the applied interest rate is in compatible with the existing interest-free rate.
Presently, the alterations have slight effects on measurement results in the life insurance companies and occupational pension funds that must report applying the model. Nevertheless, this could become more substantial if the companies change the structure of their portfolios in the future.
The traffic light model, which at this time can only exhibit red light only, will determine the life insurance companies and occupational pension funds risk and is a counterpart of other means of supervisory functions. More so, companies labeled with red light shall not be sanctioned automatically. Basically, these red-light companies will be subject to comprehensive review. Finally, it entails ensuring that futures warranted pensions will be paid.
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