Unlike Fitch and unlike Standard and Poor's, Moody's Investors Service is yet to finalise its approach to rating Basel III-compliant tier 1 and tier 2 capital issued by the banks. In fact, Moody's has had a moratorium in place on rating such instruments since February 2010.Moreover, Moody's is still factoring in a level of government support in the rating of some non-Basel III compliant subordinated debt.Moody's issued a request for comment last week on how it should go about rating Basel III-compliant tier 1 and tier 2 capital instruments. Moody's also asked whether it is appropriate to continue to assume a level of government support for plain vanilla subordinated debt.Fitch published its criteria for dealing with these issues last December, while S&P published its criteria more than a year earlier.While there are some differences in the approaches taken by Fitch and S&P, the outcome is largely the same.First, the rating of plain vanilla subordinated debt is no longer determined by notching off the senior unsecured rating assigned to the bank. The lack of government support for subordinated creditors in the post-GFC environment is recognised.Thus, the notching down for subordinated debt ratings is taken from the viability rating or the stand-alone credit profile (SACP) respectively, of the bank. Typically, the rating on the subordinated debt will be one notch lower.When rating Basel III compliant instruments the notching will also be taken from the viability rating or the SACP, but the number of notches will be greater.Subordinated debt now takes the form of gone concern capital. In other words, the holders of the subordinated debt will have their debt converted to equity or written off once the issuing bank has become non-viable. This subordinated debt will be rated two notches lower.Tier 1 capital also provides for holders to be bailed in while the issuer remains a going concern. Typically, there is a capitalisation trigger below which conversion or a write-off takes place.If the capitalisation trigger is relatively low, the notching applied may be only three notches. If the capitalisation trigger is set quite high, and, therefore, could be easily activated, the rating on the instrument could be five notches below the viability rating or SACP.Moody's is looking to implement similar criteria for rating these instruments but with a couple of surprising differences.Moody's is proposing that a rating cap of 'Ba1' be applied to tier 1 capital instruments with a low capitalisation trigger. This means that the hybrid securities recently issued by Australia's major banks would all be rated as junk by Moody's.Second, Moody's is proposing to continue its moratorium on rating tier 1 capital with a high capitalisation trigger. These instruments are consider too close to equity to be rated.