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Global Credit Research - 26 Jul 2010
New York, July 26, 2010 -- In an updated assessment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Moody's Investors Service has confirmed
its earlier views that the net impact of the reforms on US banks will
be a modest positive for their stand-alone financial strength ratings.
However, debt and deposit ratings of some banks could come under
pressure as Moody's assumptions about government support are reduced.
"The legislation will prove to be a modest positive for the stand-alone
strength of US banks by compelling them to act in the interest of financial
stability," said Robert Young, Managing Director for
Moody's North American Bank Ratings. "Requirements such as
higher capital reserves and limits on leverage, investment concentration,
and high-risk activities reduce, although do not eliminate,
risk and volatility."
Moody's expects that bank financial strength ratings (BFSRs) will
improve over time as a net result of these changes, banks'
capital raises, and as the large markdowns and credit loss provisions
taken over the past few years come to an end. Unsupported bank
financial strength ratings are not, however, likely to return
to pre-crisis levels.
The average BFSR for US banks is currently C, which corresponds
to an A3 on Moody's long-term scale, as compared to
a B-, or A1, in early 2007.
At the same time, banks' debt and deposit ratings will come
under pressure if government support is removed in greater measure or
at a faster pace than financial strength improves.
"The ultimate intent of the resolution authority of the law is clear,
which is to impose greater market discipline and reduce government support,"
Moody's Young said.
However, Moody's continues to believe that there will be significant
challenges when trying to resolve complex, interconnected,
global firms, especially given the uncertainty in the current market
"Over the next 12 to 24 months, we expect that government
support will revert to pre-crisis levels or even lower, and
that the government's willingness to extend such extraordinary support
to a troubled bank will be less in the future," says Mr.
Young. "But we do not anticipate that we will completely
eliminate the assumption of support from the senior debt and deposit ratings
of systemically important banks," added Mr. Young.
Also, as previously stated, for those banks whose ratings
have been lifted during the crisis but that may not be systemically important
outside of the crisis (e.g., some SCAP participants),
we expect to reduce support assumptions in the shorter-term because
their failure would be less likely to trigger contagion and a systemic
The report is titled, "Credit Implications of the Dodd-Frank
Wall Street Reform and Consumer Protection Act on US Banks."
* * * * *
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MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service
Senior Vice President
Financial Institutions Group
Moody's Investors Service
Moody's: Credit Implications of Financial Reform Legislation on US Banks
No Related Data.
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