Moody’s New Bank Rating Methodology
In addition to the recent collapse of the sub-prime mortgage market, creditland has also been assessing the Incorporation of Joint-Default Analysis into Moody’s Bank Rating Methodology.
JDA functions on the principle that the risk of default for some obligations depends on the performance of both the primary obligor and another entity or entities that may provide support to the primary obligor.
The incorporation of JDA into our current ratings will therefore reflect more transparently both a bank’s standalone financial strength as indicated by the Bank Financial Strength Rating (BFSR) as well as Moody’s opinion of the probability that it’s operating parent, coop group, or local or national government authorities will extend support to a bank to prevent a default on local currency deposits.
In Moody’s Credit Perspectives on February 26, David Fanger, Moody’s chief credit officer for financial institutions said, “Overall there is likely to be a fairly significant number of upgrades of bank deposit ratings, with a fee downgrades. Some bank debt ratings will also be upgraded, although to a lesser extent because in some countries subordinated bank debt obligations benefit less from than systematic support than deposits.”
While Moody’s was obviously bullish about announcing and releasing their new methodology after years of work and market interaction, some were critical of the change. On Sunday Independent research shop CreditSights published Bank Ratings: Moody’s Makes Aaas of Itself and then followed up on Monday with U.S. Bank Ratings: Moody’s JDA Morass. From Bank Ratings: Moody’s Makes Aaas of Itself:
Most participants in the debt market have an intuitive feel for what a credit rating means. In simple terms it is a relative ranking of creditworthiness. Moody’s is now seeking to overturn established practice by assigning ratings that are designed purely to measure default probability (although its definition of default is quite generous - see below). And, surprise, surprise, Moody’s has discovered that when banks run into difficulties, most of them are bailed out, usually by the government, before they actually default. As a result, in most countries the larger banks (and quite a few smaller ones) will receive Aaa or Aa1 ratings. Thanks, Moody’s, but most of us knew that already - we don’t need a rating to tell us that many banks are too big to fail. Unfortunately, this means that Moody’s debt ratings are now very narrow in scope and worthless in terms of analysing relative value or relative creditworthiness.
To read a full explanation as to where Moody’s is coming from, read the Thomson StreetEvents’ Moody’s Investors Service Conference Impact of JDA Initiatives on Ratings in Nordic, Benelux, Baltic and Central European Countries Transcript
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