Moody's Investors Service announced yesterday that it has placed the ratings on the subordinated debt of eight Australian banks on review for a possible downgrade. The affected banks are ANZ, Commonwealth Bank, National Australia Bank, Westpac, Macquarie Bank, Bank of Queensland, Bendigo and Adelaide Bank, and Suncorp Bank.The review is not in any way connected with a change in the perceived credit risk of the banks but is the result of another change in rating agency criteria. This change has been brought about by the progressive implementation of the Basel III bank capitalisation rules and, in particular, the expectation of most bank regulators around the world that a bank's tier one and tier two capital will be loss absorbing.Moody's flagged a review of the criteria in a request for comment issued in early April and, among other things, asked whether it was appropriate to continue to assume a level of government support for plain vanilla subordinated debt. Moody's has had a moratorium in place on rating such instruments since February 2010.Fitch published its criteria for dealing with these issues last December. And 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.Firstly, 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) 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 one 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 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.Not surprisingly, Moody's new criteria for rating tier one and tier two capital differs little from that of Fitch and S&P. Moody's will use its Baseline Credit Assessment of the bank (its SACP, adjusted or not) and notch down from there.Plain vanilla subordinated debt will be rated one to two notches lower, while Basel III-compliant "gone concern" subordinated debt will be rated two to three notches lower. Additional tier one (going concern) capital will be rated four notches lower but