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Announcement:

Moody's: Update on bank subordinated capital methodology changes

Global Credit Research - 19 Oct 2009

New York, October 19, 2009 -- Moody's Investors Service announced today that it will release by the end of November its new rating methodology for subordinated capital, including hybrid securities, issued by banks. Ratings potentially affected by changes to the methodology will be placed on review shortly thereafter.

In conjunction with the new methodology, Moody's is considering the introduction of a modifier to the ratings for certain types of subordinated capital. Moody's is also reviewing the amount of "equity credit" it attributes to hybrids in its capital calculations.

The changes are designed to reflect the way regulators are treating banks' subordinated capital securities in response to the financial crisis. Moody's had previously expected that investors in the subordinated debt and preferred securities of troubled banks would benefit from government support in a manner approaching that which is provided to depositors and senior creditors. However, with the severity of this financial crisis, subordinated capital, particularly the most junior, has been susceptible to losses, both in the form of principal write-downs and coupon suspensions. In some cases, government support packages have been contingent upon banks' suspension of coupon payments on hybrids as a means to preserve capital.

Moody's issued a call for comment to the market in June on proposed changes to its methodology for rating subordinated capital and the comment period ended in July. Since that time, Moody's has expanded the scope of its review to include the senior subordinated debt issued in certain jurisdictions that have coupon skip mechanisms. In addition, Moody's is considering the addition of a modifier to the ratings of certain subordinated instruments in order to address feedback received from the market during the comment period.

The hybrid rating modifier under consideration would reflect the unique risks of certain types of subordinated instruments that allow the issuer to skip coupon payments. Because these payments can be deferred, or possibly eliminated, and because principal write-downs can be imposed, the likelihood of government intervention that would result in investor losses is greater for these instruments than for other debt securities.

After the methodology is finalized, Moody's will review the way it classifies hybrid securities in terms of the relative amount of debt and equity that they contribute to calculations of a bank's capital ratios. As part of this reevaluation, greater "equity credit" may be given for deeply subordinated, non-cumulative instruments while less may be given for hybrids without these features. During this review, Moody's will also examine corporate and insurance hybrids.

For more information, see "Request for Comment: Moody's Proposed Changes to Bank Subordinated Capital," available on moodys.com.

* * *

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +33-1-5330-1020; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7-495-228-60-60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Leon Claassen in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com

New York
Barbara J. Havlicek
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's: Update on bank subordinated capital methodology changes
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© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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