U.S. bank sponsors are well placed to meet the near-term potential funding needs of sponsored Structured Investment Vehicles (SIVs), but sudden funding needs could be more challenging if the credit or liquidity environment worsens, Fitch Ratings cautions.

In a report published today, the agency assesses the potential for banks to support these vehicles, even though they are not legally obliged to do so. In total, 11 banks sponsor 20 SIVs with combined senior notes outstanding estimated at US$246 billion as at the end of July.

Bank sponsored SIVs dominate the SIV industry, accounting for around 72% of senior notes outstanding. A further nine SIVs are sponsored by a mixture of investment managers and specialist arms of non-bank financial institutions.

While Fitch considers it unlikely, under a worst-case scenario, support may require a sponsored SIV to be consolidated onto a bank’s balance sheet. Currently Fitch views the majority of banks as having adequate capital to absorb these vehicles. However, the extent of any specific capital deterioration will depend upon the valuation of the SIVs’ underlying assets, it notes.

This, in combination with other liquidity calls from asset-backed commercial paper conduits, leveraged buyout loan exposures plus general valuation issues regarding structured products, could cumulatively have a negative impact on capital. This may increase ratings pressure, given the current market environment. Under such a scenario, negative rating actions could not be ruled out.

Fitch expects minimal capital impact on banks that do not sponsor SIVs, although for entities with significant exposure to the riskier capital notes of these vehicles, negative rating actions remain a possibility.