Moody's reviewing bank methodology
Moody's is proposing to introduce a "loss given failure" analysis into its bank rating methodology. The introduction of such an analysis recognises the global shift since the Global Financial Crisis to bank resolution schemes that seek to minimise the use of taxpayer funds to support failing banks.The LGF analysis should provide a superior framework for determining how each type of bank creditor will be affected by a bank resolution. How many other creditors will be bailed-in ahead of a particular creditor, thereby protecting this creditor from loss?For banks to which this methodology will be applied, Moody's expects the rating impact to be mostly positive. For banks that will continue to be supported by likely government bail-outs, bankruptcy or ad-hoc resolution, Moody's will apply its existing notching practices, based on the type of instrument being rated.Moody's is also proposing to enhance and increase the transparency of its methodology for determining the stand-alone strength of banks, through its Baseline Credit Assessment. Moody's will introduce a new scorecard incorporating both quantitative and qualitative assessments with a forward looking scenario analysis, and a Macro Profile will be introduced and incorporated for the sovereign domicile of the bank.This sounds very similar to the analytical framework that has been used by Standard & Poor's since the GFC.If the changes are implemented as proposed, Moody's expects the impact will be greatest on the ratings assigned to banks in the European Union and North America. Surprisingly though, Moody's estimates that senior unsecured and deposit ratings are likely to increase by 0.5 notches globally.Implementation of S&P's revised bank rating criteria generally resulted in a decline in ratings.Moody's requests that comments on its proposed methodology changes be submitted by 7 November 2014.