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Moody's: Banks' standalone credit strength unlikely to return to pre-crisis levels, even under Basel 3

Global Credit Research - 04 May 2011

New York, May 04, 2011 -- Moody's Investors Service says in a new report that although Basel 3 is credit positive for banks, the standalone financial strength of banks weakened by the global financial crisis is unlikely to return to pre-crisis levels in the short term. The report discusses the likely impact of Basel 3 on bank credit profiles and how different groups of banks may be affected in the new Basel 3, post-crisis environment.

The framework agreed by the Basel Committee on Banking Supervision in the aftermath of the financial crisis sets new standards for global bank regulation. "Basel 3 will be positive for bank creditors overall, as it will improve the resilience of the global banking system by adding sizeable capital and liquidity buffers," says Vice President and co-author of the report Tobias Moerschen. The recovery of banks' credit profiles, however, is constrained by the pressures many institutions still face given the fragile economic recovery in developed markets, skittish financial markets, and new global risks.

"While directionally positive, Basel 3 does not cure the structural challenges banks continue to face from a credit perspective, such as illiquidity and high leverage, nor does it alleviate the tension between profit-maximizing equity holders and bank managers in contrast to risk-averse bondholders," notes Senior Vice President and co-author of the report Alain Laurin. While important, the new regulatory framework is therefore only one part of the broader effort to improve banks' resilience to economic downturns.

Stricter regulatory standards and investors' elevated focus on risks in the post-crisis environment will not affect banks in a uniform manner. The report discusses three different groups of banks: 1) institutions that are able to raise additional capital and bolster liquidity to meet Basel 3 requirements, which may see their credit strength improve; 2) weaker banks that will be challenged to comply with the new rules, and may see their credit profiles deteriorate; and 3) banks that are already largely compliant with Basel 3, whose credit strength likely will remain stable. With the new rules acting as a catalyst for change, weaker banks may seek acquirers, seek government support, or wind down part or all of their operations, with potentially adverse consequences for creditors.

The report notes that considerable uncertainty remains about the effects of Basel 3 due to the long transition period (banks have until 2019 to fully comply) and the likelihood that parts of the proposed framework may change. Additionally, jurisdictions may differ in how they adopt the new rules, with the potential for regulatory arbitrage. Banks are also just beginning to formulate how they will adapt to the Basel 3, post-crisis world and their strategies could have a significant impact on their intrinsic financial strength.

The report is titled "Banks' Standalone Credit Strength Unlikely to Return to Pre-Crisis Levels, Even under Basel 3" and is available on www.moodys.com.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

New York
Tobias Moerschen
Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Gregory W. Bauer
MD - Global Banking
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: Banks' standalone credit strength unlikely to return to pre-crisis levels, even under Basel 3
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

 


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MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy."

 


For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to make any investment decision based on MOODY'S credit rating. If in doubt you should contact your financial or other professional adviser.

© 2013 Moody's Investors Service, Inc., Moody’s Analytics, Inc. and/or their affiliates and licensors. All rights reserved.
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