S&P Increases Loss Assumptions Under Bank Stress Tests
Standard & Poor’s has issued revised assumptions for loan losses that could result in ratings downgrades for the most vulnerable US banks.
However, S&P notes that the potential for extraordinary government support could mitigate the impact on ratings.
“In general, the results of credit stress testing will likely affect the ratings on hybrid capital instruments–including all manner of preferred stock–more than credit ratings. We assume that banks with capital deficiencies are likely to suspend payments first on hybrid capital issues.”
For example, S%P has increased its May 2008 assumption for losses on commercial real estate loans from 0.5% to 4.0% today, under a base scenario, and from 4.0% to 7.0% in a stressed-case scenario.
The highest loss rate assumption is 13.0% for credit card loans under a stressed-case scenario, up from 10.0%.
“We believe that our recently updated methodology and the assumptions we discuss here could affect the stand-alone assessments of creditworthiness of U.S. financial institutions. The greatest impact could be on hybrid ratings, which we could lower by as much as several notches. This reflects the rising likelihood that banks will use this source of flexibility as economic and financial sector stress continues to mount. However, we could also lower senior and subordinated ratings for the most vulnerable institutions.”
For details of S&P’s updated assumptions see “Stress Testing U.S. Financial Institutions.“: and for further background see “Credit Stress Testing For Financial Institutions,“
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