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27 Apr 2010
New York, April 27, 2010 -- Moody's Investors Service said that the Senate Regulatory Reform
Bill (the "Dodd Bill") could result in lower debt and deposit
ratings for US banks and other financial institutions whose ratings currently
benefit from assumed government support.
"The Dodd bill contains provisions that, if passed into law,
could weaken our assumptions regarding the probability that the US government
would support the largest, most systemically important financial
institutions," said Robert Young, Managing Director
for Moody's North American Bank Ratings. "In particular,
new resolution authority for 'non-banks', including
bank holding companies, could increase the ability of regulators
to unwind large, interconnected financial institutions, and
this could be detrimental to bondholders over time."
Moody's currently incorporates an assumption about the probability
of systemic support that provides ratings 'lift' into its
debt and deposit ratings for 17 of the approximately 70 US banks it rates
(these 70 comprise 85% of US banking system assets). Far
fewer institutions received this lift prior to the financial crisis.
As the financial crisis recedes and a new regulatory regime is implemented,
Moody's expects to reduce its support assumptions for US banks.
This would reduce the number of banks benefitting from support and the
amount of support assumed for those banks that continue to benefit from
it. However, it is unlikely that Moody's would entirely
eliminate its assumption of support for all institutions.
Even after the final structure of regulatory reform is established,
we expect there to be countervailing forces that could (1) limit the reduction
in Moody's assumption of the likelihood of future support or (2)
extend the period of time over which Moody's would reduce its support
assumptions. This will be determined, in large part,
by the flexibility that regulators will be provided to deal with troubled
institutions or systemic problems. Moody's will need to consider
the credibility/probability of the actual use of the provisions,
including resolution authority, especially over the near-term
while the economy remains fragile. Regarding this point,
mandatory usage of the law's provisions would be particularly challenging
for bank credit from both an individual institution as well as a systemic
Additionally, Moody's would need to take into account the
potential benefits and costs to banks' stand-alone credit
strength that could result from the law. These, too,
can only be assessed once the final provisions of the legislation are
established. Provisions that increase required capital and liquidity
buffers at banks would, on their face, improve banks'
stand-alone credit standing. This would offset some of the
negative pressure on the debt and deposit ratings of those banks which
currently receive some ratings lift due to support. Yet,
some of the proposed limitations on bank activities, such as proprietary
trading or over-the-counter trading in derivatives,
might weaken the earnings power of some banks. In addition,
through their search for shareholder returns, banks may seek to
expand risk-taking elsewhere. Finally, Moody's
will also consider the pace over which any benefits would accrue to banks'
stand-alone credit strength versus the likely pace over which systemic
support would be curtailed.
Given continued uncertainties with regard to the final form of any regulatory
reform in the United States, Moody's is unlikely to take related
actions on potentially affected banks' ratings until there is clarity
on the law's content and implications. As well, given
the issues discussed above, it is unlikely that Moody's would
simply change ratings once clarity is achieved, but rather Moody's
would more likely place potentially affected ratings under review at that
The following is a list of those US banks whose ratings currently benefit
from Moody's assumption of support (including their bank deposit
rating and the number of notches of "lift" that this rating
currently receives as a result of Moody's support assumptions):
Bank Of America, Aa3, 5 notches
Citigroup, A1, 4 notches
Wells Fargo, Aa2, 4 notches
Bank of New York Mellon, Aaa, 2 notches
JPMorgan Chase, Aa1, 2 notches
Morgan Stanley, A1, 2 notches
Regions Financial, Baa1, 2 notches
SunTrust, A2, 2 notches
BB&T, Aa2, 1 notch
Capital One, A2, 1 notch
Fifth Third, A2, 1 notch
Goldman Sachs, Aa3, 1 notch
KeyCorp, A2, 1 notch
PNC Financial, A1, 1 notch
State Street, Aa2, 1 notch
US Bancorp, Aa1, 1 notch
Zions, Ba2, 1 notch
Please see Moody's "Dodd Bill May Reduce Systemic Support
for Bank Debt", dated March 2010, for further analysis
of the provisions of the originally proposed Dodd Bill.
* * *
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Financial Institutions Group
Moody's Investors Service
Moody's: Senate Regulatory Reform Bill Still Fluid and Still a Potential Negative for Supported US Bank Ratings
Senior Vice President
Financial Institutions Group
Moody's Investors Service
No Related Data.
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