Review focuses on reassessment of government support assumptions
London, 29 November 2011 -- Moody's Investors Service has today placed on review for downgrade
all subordinated, junior subordinated and Tier 3 debt ratings of
banks in those European countries where the subordinated debt still incorporates
some ratings uplift from Moody's assumptions of government support,
with the potential complete removal of government support in these ratings.
The review will affect 88 banks in 15 countries in Europe with average
potential downgrades of subordinated debt by two notches and junior subordinated
debt and Tier 3 debt by one notch. The greatest number of ratings
to be reviewed are in Spain, Italy, Austria and France.
For issuers whose ratings were already under review prior to today's rating
action, the completion of the existing review will now incorporate
these additional considerations for subordinated, Tier 3 and junior
subordinated debt.
Today's rating announcements follow on from the removal of systemic
support from subordinated debt in systems including Denmark, UK,
Ireland, Germany and Moody's report "Moody's to
re-assess government support in bank sub debt ratings globally"
published February 2011.
The review has been caused by the rating agency's view that within
Europe, systemic support for subordinated debt may no longer be
sufficiently predictable or reliable to be a sound basis for incorporating
uplift into Moody's ratings.
This concern is driven by (i) the more limited financial flexibility of
many European sovereigns that will increasingly be required to make difficult
decisions regarding fiscal consolidation policies; and (ii) the resolution
frameworks being discussed by both national and supra-national
authorities (for example by the European Commission, which is expected
to announce its proposals shortly).
The frameworks have the common objective of reducing very significantly
the support provided to creditors and leave subordinated debt holders
particularly exposed to exclusion from any support received.
During the review period, Moody's will (i) review the outcome
of the expected European Commission proposals on bank resolutions and
the implications for burden-sharing with subordinated debtholders;
and (ii) interact with regulators and authorities to see if there is any
additional information that would lead Moody's to maintain an assumption
of support in the subordinated debt ratings.
RATINGS RATIONALE
Moody's believes that systemic support for subordinated debt in
Europe is becoming ever more unpredictable, due to a combination
of anticipated changes in policy and financial constraints. Policy
makers are increasingly unwilling and/or constrained in their support
for all classes of creditors, in particular for subordinated debt
holders. Moody's notes that there have been recent instances
where losses have been imposed on subordinated debt holders without any
significant contagion to other liability classes (e.g.,
in Ireland). Consequently, there would need to be very clear
reasons for Moody's to consider retaining an assumption of support
in subordinated debt ratings.
For some time, the policy debate and framework within Europe has
been moving in favour of imposing losses on subordinated debt holders
outside of an insolvency scenario. Proposals and legislative changes
to permit this include statutory writedown mechanisms, or mechanisms
which enable authorities to either transfer debt between institutions
or split up a bank and impose losses on subordinated debtholders.
Some countries have already changed their legal or regulatory frameworks
to incorporate this policy objective (e.g. UK, Denmark,
Germany). There have also been cases where an ostensibly supportive
legal framework has been quickly changed to an unsupportive framework,
following a weakening of the sovereign and banking system (e.g.,
in Ireland).
Moody's awaits the European Commission's proposed framework
on resolution regimes -- originally anticipated this summer
but now delayed -- which the rating agency believes is likely
to result in an explicitly less supportive framework for subordinated
debt across the EU. However, even if there is a further delay
in the publication of the framework, Moody's considers the
evidence that sovereigns can quickly change the existing legal framework
as reason to continue with the review of systemic support in subordinated
debt, given the other pressures on sovereigns in the current environment.
Many of the above concerns were already expressed in Moody's February
2011 publication "Supported Bank Debt Ratings at Risk of Downgrade
Due to New Approaches to Bank Resolution". Since that publication,
however, many euro-area sovereigns have become increasingly
constrained in their financial flexibility and consequently in their ability
to support their banking systems. In several cases, the sovereign
has faced an increasingly stark trade-off between the need to preserve
confidence in their banking systems and the need to protect their own
balance sheets.
While the need to preserve confidence may imply some continuing (though
potentially declining) support for senior debt -- given
the potential for contagion across the banking system --
the rationale for continuing to assume the willingness and ability to
provide support for subordinated debt holders is much weaker. Moody's
has seen clear precedents that losses can be imposed on subordinated debt
holders without any significant contagion to other liability classes.
Moody's view is that these pressures go beyond the euro area to
encompass all EU members; Moody's will also review to what
extent other closely integrated markets outside the EU, such as
Norway or Switzerland, are affected by this change in its support
assumptions.
IMPACT OF REVIEW
The banking systems and number of banks affected by the review are in
the following countries: Austria (9), Belgium (3), Cyprus
(2), Finland (3), France (8), Italy (17), Luxembourg
(3), Netherlands (6), Norway (5), Poland (1),
Portugal (2), Slovenia (2), Spain (21), Sweden (4),Switzerland
(2). A list of affected institutions is attached: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF268891
A full analysis of the effect of the review is set out in the Special
Comment published today "Reassessment of Government Support Assumptions
in European Bank Subordinated Debt". For the latest details
on Moody's global approach to incorporating systemic support in
Moody's bank debt ratings please see, "Status Report
on Systemic Support Incorporated in Moody's Bank Debt Ratings Globally."
Both reports were published today and can be found on www.moodys.com
.
The methodologies used in this rating were Moody's Guidelines for Rating
Bank Hybrid Securities and Subordinated Debt published in November 2009,
and Incorporation of Joint-Default Analysis into Moody's Bank Ratings:
A Refined Methodology published in March 2007. Please see the Credit
Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Some of the ratings of entity Caisse C'ale du Credit Immobilier were initiated
by Moody's and were not requested by the rated entity.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
this review.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
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tab of the issuer page at www.moodys.com, for each
of the ratings covered, Moody's disclosures on the lead rating
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ratings.
Elisabeth Rudman
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
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United Kingdom
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Johannes Wassenberg
MD - Banking
Financial Institutions Group
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Releasing Office:
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Moody's reviews European banks' subordinated, junior and Tier 3 debt for downgrade
