Moody's Investors Service has downgraded the subordinated debt ratings for eight Australian banking groups because public sector support for investors holding these securities cannot be assumed in a banking crisis. Moody's actions are in keeping with views expressed at a recent Fitch Ratings conference in Sydney, where the increased risk of a creditor bail-in faced by bank sub debt holders was outlined in detail, using the European banks as an example.Australian banks' senior debt ratings were not affected, however, with Moody's being keen to emphasise that it rates these banks "amongst the very strongest in the world on a stand-alone basis". Additionally, the ratings agency said it continues to incorporate the potential for systemic support into the ratings of banks' senior debt obligations.The fate of subordinated debt and junior debt - tier two debt under Basel II rules - is another matter altogether. A review by Moody's of the level of public sector support for this type of debt concluded these note-holders would be among the first to be considered for a creditor "bail-in", possibly through conversion of their debt into equity."We recognise that Australian bank supervisors have, in the past, acted in a manner to support all bank creditors," said Patrick Winsbury, a Moody's senior vice president in the agency's Sydney office."However, the global financial crisis has demonstrated that support can be provided selectively, and bank recapitalisation costs shared with subordinated creditors without triggering any contagion, as was previously feared." In crisis-hit countries, this was accomplished either through laws or regulations, or by convincing investors to voluntarily enter into distressed exchanges."Accordingly, while some systemic support may still be available for subordinated debt in Australia, we view its predictability to have declined to the point where it is no longer appropriate to incorporate any uplift in the subordinated debt ratings of Australian banks," said Winsbury.