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16 Mar 2015
Paris, March 16, 2015 -- Moody's Investors Service has published its updated methodology
for rating banks globally, which incorporates several new components:
a Loss Given Failure (LGF) analysis; the introduction of a Macro
Profile into the elements that Moody's considers when it assigns
a bank's baseline credit assessment (BCA); a BCA scorecard
which now incorporates not only financial ratios but also a broader range
of metrics and qualitative considerations; and a Counterparty Risk
Assessment (CR Assessment).
The revisions to the methodology reflect insights gained from the crisis
and the fundamental shift in the banking industry and its regulation.
The revised approach to establishing BCAs helps to more accurately predict
bank failures, while Moody's LGF framework assesses how different
creditor classes are likely to be affected when a bank enters resolution
based on the relevant resolution policy and balance sheet structure.
The updated methodology, "Rating Methodology: Banks,"
is now available on www.moodys.com, and can be accessed
via this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_179038.
The introduction of this new methodology follows a market consultation
initiated via a Request for Comment published on 9 September, 2014.
"The first key change is the introduction of a Loss Given Failure
(LGF) analysis, which addresses expected loss and assesses the impact
a bank's failure would have on its various debt instruments and
deposits in the absence of any support. For banks subject to operational
resolution regimes, the LGF analysis will incorporate the cushion
against loss that each creditor class derives from the amount of debt
subordinate to it in a resolution," says Gregory Bauer,
Managing Director Global Banking, Moody's.
"With the recent dramatic shift in public policy toward implementation
of resolution regimes, it has become increasingly important for
investors to know their position in a bank's liability structure,
and thus the potential losses they are exposed to in the event of a resolution,"
continues Bauer. "LGF analysis directly addresses this key
Moody's employs both a basic and an advanced LGF analysis.
The basic LGF analysis applies to banks that are not subject to operational
resolution regimes. The advanced LGF analysis applies to banks
that are subject to operational resolution regimes, whereby losses
can be imposed selectively on creditors outside of a liquidation,
and through which specific legislation provides a reasonable degree of
clarity on how the bank's failure could affect depositors and other
Basic LGF analysis entails an approach wherein senior unsecured debt and
deposits are positioned at the level of the adjusted BCA (the adjusted
BCA is the BCA plus Moody's assessment of support from affiliates
being forthcoming in the event of need), before government support
and additional coupon-related notching considerations. Subordinated
instruments are positioned at one notch below the adjusted BCA,
excluding support and additional notching, reflecting increased
loss severity. This basic LGF analysis continues the previous notching
practice and, in the rating agency's view, remains an
appropriate guide to loss severity for banks in systems without operational
Under the advanced LGF analysis, which would be applied, for
example, to banks subject to the European Union's Bank Recovery
and Resolution Directive and to US banks subject to Titles I and II of
the Dodd-Frank Act, Moody's bases its notching on (1)
the likely bank-wide loss rate in failure; (2) the amount
of subordination below a given instrument class; and (3) the volume
of a given instrument class itself. In Moody's view,
taking these together provides a more refined and predictive view of expected
loss for each instrument class under new resolution regimes.
"The second key change is the revision of our framework for assessing
the risk of bank failure, expressed by our baseline credit assessment.
This includes the introduction of a Macro Profile, which allows
us to place greater emphasis on potential system-wide pressures
that we believe are predictive of the propensity of banks to fail,"
explains Frederic Drevon, Managing Director Global Banking,
Moody's framework for assigning BCAs is structured around a new
Scorecard that more comprehensively integrates Moody's analytical
judgments. The Scorecard begins by focusing on five core ratios
that Moody's has found to be predictive of bank failure covering
five main financial factors: asset risk, capital, profitability,
funding structure and liquid resources. Additionally, analysts
and rating committees may consider supplementary ratios, as relevant,
for each institution. Individual scores for each factor will now
directly incorporate not only financial ratios, but also a broader
range of metrics, Moody's forward-looking judgments
and qualitative considerations relative to each.
Moody's new Macro Profile complements the bank-specific analysis
reflected in the Scorecard and will be expressed on a scale ranging from
Very Strong+ to Very Weak-. It comprises six elements:
economic strength, institutional strength, susceptibility
to event risk, credit conditions, funding conditions and industry
structure. The Macro Profile, combined with the results of
the Scorecard, helps establish the bank's Financial Profile.
This results in the BCA, representing Moody's view of a bank's
probability of default, in the absence of support.
Lastly, Moody's has introduced a Counterparty Risk (CR) Assessment
into its analysis. This is not a rating, but an assessment
of an issuer's ability to avoid defaulting on certain senior bank
operating obligations and other contractual commitments. The CR
Assessment takes into account the issuer's standalone strength as
well as the likelihood of affiliate and government support in the event
of need, reflecting the anticipated seniority of counterparty obligations
in the liabilities hierarchy. The CR Assessment also takes into
account other steps authorities can take to preserve the key operations
of a bank in a resolution.
When credit rating methodologies are revised, the updated methodology
is applied to all relevant credit ratings. Accordingly, in
the coming days, Moody's will place on review the ratings
of those banks that are likely to be affected. Regulation requires
that rating actions related to methodology changes be completed within
six months of the release of the methodology. However, Moody's
expects to conclude the large majority of the reviews in the first half
of 2015. In conjunction with the methodology-driven review,
Moody's expects to incorporate revised views on government support
in Europe, driven by the introduction of resolution regimes.
For any banks whose ratings are placed under review, CR Assessments
will be assigned when the reviews are concluded; for other banks,
CR Assessments will be assigned in the coming months.
Moody's preliminary assessment of the anticipated impact of the
new methodology and revised support assumptions shows that the ratings
impact is likely to vary across countries and regions. Moody's
anticipates the following key outcomes:
(1) An overall net neutral impact on banks' BCAs globally,
with around 15% of BCAs changing. About half of these changes
are anticipated to be within Europe, with a modest positive bias;
(2) in the US, a significant positive effect on bank deposit ratings
and a material negative effect on senior unsecured bank debt ratings.
This reflects the nature of deposit preference, which benefits depositors
at the expense of senior unsecured debt. However senior unsecured
holding company ratings are expected to be little changed, overall;
(3) in the EU and western Europe, a modest positive effect on deposit
ratings and a broadly neutral effect on senior unsecured ratings,
reflecting the changes in BCAs coupled with the counterbalancing effects
of the new resolution regime and reduced likelihood of government support.
While support is expected to decline, banks' most senior creditors,
especially depositors, will benefit from the lower loss rates expected
in an orderly resolution and the subordination that protects them from
(4) in Asia Pacific, the Commonwealth of Independent States,
Western Asia, Latin America, the Middle East and Africa,
a small negative effect on senior unsecured and deposit ratings in some
systems. This reflects Moody's view that the capacity for
government support is henceforth limited to the government bond rating,
and that there is little scope for other policy tools to provide durable
support beyond this constraint.
NOTE TO JOURNALISTS ONLY: For more information, please call
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Financial Institutions Group
Moody's France SAS
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JOURNALISTS: 44 20 7772 5456
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Gregory Winans Bauer
MD - Global Banking
Financial Institutions Group
Moody's publishes its new bank rating methodology
Moody's France SAS
96 Boulevard Haussmann
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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