Bank Debt Ratings in the New Bail-in World

Transcription

2015
Swiss Institutional
Investors Conference
Products – Workshop 3
Bank Debt Ratings in the New
Bail-in World
Matthias Ogg
Director, Investment Banking Securities FID
Investment Banking
Credit Suisse
Marketing Material – It is not Investment Research
Bank Debt Ratings in the New Bail-in
World
16 September 2015
Matthias Ogg, Capital Structuring, CS FID
PRELIMINARY | SUBJECT TO FURTHER REVIEW AND EVALUATION
These materials may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with
Credit Suisse AG or its Affiliates (hereafter “Credit Suisse”).
Table of contents
1. Bail-in risk – a quick refresher
2. Ratings in new bail-in world
A. Overview on where we stand
B. Moody’s revised methodology (incl. LGF)
C. S&P’s methodology (incl. ALAC)
\\nlon12p20502a\mogg1$\Personal\Conferences\2015 Luzern - Bank debt ratings in the new bail-in world.pptx
3. Rating bank capital securities
1
© Credit Suisse AG and/or its affiliates
1. Bail-in risk – a quick refresher
2
Addressing TBTF problem: Bail-in of creditors
Too Big
Too Fail
Paul Calello / Wilson Ervin
“From bail-out to bail-in”
The Economist (28 Jan 2010)
Dodd Frank Act
July 2010
Banking Act 2009
Financial Services Act
2012
Bank Restructuring
Act
1 Jan 2011
Bank Insolvency
Ordinance
1 Nov 2012
Bank Recovery and
Resolution Directive
Sub debt: 1 Jan 2015
Senior: 1 Jan 2016
3
Bank Insolvency Ordinance
Bank Recovery and
Resolution Directive
Resolution Mechanism Act
Common Equity Tier 1 (buffer)
High Trigger CoCos (7% trigger)
Additional Tier 1 (5.125%)
Additional Tier 1 (5.125%)
Low Trigger CoCos (5% trigger)
Tier 2 (PONV)
Tier 2 (PONV)
Common Equity Tier 1 (min)
(3)
Subordinated Debt
Senior unsecured
Senior
unsecured
Other Liabilities
Privileged & Secured Claims
(2)
Sub Debt / HoldCo Senior Debt
HoldCo Senior / Subordinated
Non Privileged Deposits
(1)
Point of NonViability (PONV)
Resolution
Discretionary exclusions
possible(1)
Loss absorption waterfall
Bail-in sequence in Switzerland, EU and Germany
Senior
unsecured
Other
Liabilities
Nonpreferred
Deposits
Other Liabilities
Non-preferred
Deposits
Preferred Deposits
(natural persons + micro + SMEs)
Preferred Deposits
(natural persons + micro + SMEs)
Deposit Guarantee Scheme
(in lieu of insured deposits)
Deposit Guarantee Scheme
(in lieu of insured deposits)
Excluded Liabilities(2)
Excluded Liabilities(2)
Resolution
Fund(3)
Discretionary exclusions are possible if debt cannot be bailed in within a reasonable time, to preserve critical functions, to avoid contagion and value destruction that would raise losses borne by other
creditors, for instance derivatives, uninsured retail, micro & SME deposits
Secured debt (including covered bonds), staff (ex bonus), tax, trade liabilities, insured deposits, client assets, payment & settlement liabilities with remaining maturity of < 7 days, interbank liabilities with
original maturity of < 7 days
Resolution fund is only available after 8% of total liabilities incl. own funds have absorbed losses. Contribution of RF is capped at 5% of total liabilities incl. own funds
4
Impact of bail-in risk for senior creditors
No or very limited government support
Greater dependence on actions taken by the regulator
Quick restructuring through bail-in or other measures can bring bank
back to financial health before too much value is destroyed
Large buffer of subordinated debt and clear creditor hierarchy should
reduce bail-in risk for most senior ranking creditors and depositors and
consequently the risk of a bank-run
Disclosure requirements will further increase: resolution path, bail-in
hierarchy, amount of junior deposits, level of asset encumbrance,
regulatory capital requirements (incl. Pillar 2, RWA sensitivities)
5
2. Ratings in new bail-in world
A. Overview on where we stand
6
Evolution of bank debt ratings since pre-crisis
Moody’s JDA
Methodology
(Apr 2007)
21.00
Aaa/AAA
Average support
(in notches)
Lehman failure
(Sep 2008)
Basel III
(Dec 2010)
20.00
Aa1/AA+
CRR
(Jun 2013)
19.00
Aa2/AA
Moody’s:
2.63
S&P’s:
0.80
Fitch:
0.13
Moody’s LGF
(Mar 2015)
18.00
Aa3/AA-
BRRD
(Jun 2014)
17.00
A1/A+
-0.25
Moody’s: +0.31
Moody's adj. BCA
A3/A15.00
Senior rating change
(since 1 Jan 2015)
Fitch:
Moody's
16.00
A2/A
S&P ALAC
(YE2015)
S&P’s:
-0.19
S&P
S&P SACP
14.00
Baa1/BBB+
Fitch
13.00
Baa2/BBB
Fitch VR
12.00
Jan-05
Source:
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Sep-15
Moody’s, S&P, Fitch
7
Will rating agencies become more relevant again?

Creditors can no longer rely on governments / taxpayers to be bailed out

As a result, a thorough analysis of banks financial credit metrics is required
(capital, asset quality, profitability and liquidity)

Banks continue to be exposed macro environment

Regulatory and political environment highly important, and can potentially
change fast

Understanding resolution path and liability structure at point of failure
requires detailed analysis
8
Rating developments in 2015 – Overview
 March
 Removal
2015 rating actions
2015: Revised Bank
methodology
 March – June: Implementation
of revised methodology
2015 average senior
rating changes
+
-
Late 2015 / early 2016:
− Removal of systemic
support
− Recognition of ALAC
Upgrade of OpCo senior debt
ratings once banks have built up
sufficient TLAC buffer
Expected changes
Ratings adjustment for
− Changes to insolvency
hierarchy (e.g. Germany)
− Increase in amount of
subordinated debt
− Increase in amount of
HoldCo senior debt
Meaning of rating
Expected loss
Probability of default
Probability of default
Potential uplift for
loss absorbing debt
Up to 3 notches
Up to 2 notches
Up to 1 (potentially 2) notches
Amount of sub debt
required for uplift
1 notch for 3% of total banking
assets (1)
1 notch for 5% of S&P RWA
2 notches for 8% of S&P RWA
1 notch for 8% of RWA
Government support
1 notch for largest banks
0-2 notches – expected to be
removed late 2015 or early 2016
No uplift
(1)
0.31 notches
of systemic support of
UK / Swiss HoldCos
 Senior ratings of UK, GER,
AUT banks
0.19 notches
 Removal
of systemic support in
May 2015
-
0.25 notches
In addition to 3% of equity assumed to be remain at the time of resolution
9
B. Moody’s revised methodology (incl. LGF)
10
Moody’s revised bank rating methodology
Overview
SUPPORT & STRUCTURAL ANALYSIS
1
2
3
4
Baseline Credit
Assessment (BCA)
(aaa – c)
Affiliate
Support
Loss Given Failure
(LGF) Liability
Analysis
Government
Support
new
Analyzes a bank’s financials
and operating environment to
capture its standalone
probability of failure
OUTPUT
Adjusts the BCA to capture the
likelihood of affiliate support


BCA
(aaa – c)
Adjusted BCA
(aaa – c)
Captures the risks different
creditors are exposed to in the
event of the bank’s failure,
absent support

RATED DEPOSITS
SENIOR DEBT
SUBORDINATED
Preliminary
Ratings Assessments
(Aaa-C)
Captures the extent to which
risk to each creditor class is
mitigated by public support.

Assigned
Credit Ratings
(Aaa-C)
Source: Moody’s, Credit Suisse
11
Selected macro profile rank ordering
Macro profile for selected systems
Country
Australia
Canada
France
Germany
Switzerland
United Kingdom
United States
Japan
Korea
Mexico
Saudi Arabia
Brazil
China
Italy
Spain
India
Indonesia
South Africa
Turkey
Kazakhstan
Russia
Azerbaijan
Argentina
Cyprus
Egypt
Ukraine
Banking country risk
Very Strong
Very Strong
Very Strong
Very Strong
Very Strong
Very Strong
Very Strong
Very Strong Very Strong Strong
Strong
StrongStrong
Strong+
Strong
Moderate +
Moderate
Strong Strong Moderate Weak +
Weak Very Weak +
Strong Weak
Very Weak -
Credit conditions Funding conditions
0
-1
-2
0
0
-1
0
0
-1
0
-1
0
-1
1
-1
0
0
0
-1
0
-1
0
0
0
-2
0
-2
-1
-2
0
0
0
0
0
-1
-1
-2
0
0
0
0
0
0
0
0
0
-5
-3
-2
-1
0
-1
Industry structure
1
1
0
-1
0
-1
-1
0
0
0
0
-1
0
0
0
-1
0
0
0
-1
0
0
-1
0
0
0
Macro profile
Very strong
Very strong Very strong Very strong Very strong Very strong Very strong Strong +
Strong +
Strong Strong Moderate +
Moderate +
Moderate +
Moderate +
Moderate
Moderate
Moderate
Moderate
Weak +
Weak +
Weak Very weak
Very weak
Very weak
Very weak -
Source: Moody’s, as of March 2015
12
Baseline Credit Assessment
Standalone financial profile driven by solvency and liquidity
RISKS
RISK MITIGANTS
RISKS
RISK MITIGANTS
Asset Quality
Capital
Funding structure
Liquidity resources
Problem loans / gross loans
Tangible common equity
/ risk-weighted assets
Weight: 25%
Market funds
/ tangible banking assets(2)
Weight: 25%
Liquid banking assets
/ tangible banking assets(2)
Weight: 20%
Weight: 15%
Profitability
Net income / tangible assets(1)
Weight: 15%
Solvency
Liquidity
Total weight: 35%
Example
Total weight: 65%
Financial profile
Capital measure: TCE / RWA score (25% weight)
VS+
VS
VS-
S+
S
S-
M+
M
M-
W+
W
W-
VW+
VW
VW-
>=
>=
>=
>=
>=
>=
>=
>=
>=
>=
>=
>=
>=
>=
<
20%
18%
16%
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
5%
(1)
Tangible assets = total assets less derivatives less goodwill and other intangibles
(2)
Tangible banking assets = total assets less derivatives less goodwill and other intangibles less insurance investments
13
Macro profiles + financial ratios = initial score
Macro profile
Very
strong +
VS+
VS
VSS+
S
SM+
M
MW+
W
WVW+
VW
VW-
Financial ratio
VS+
VS
VS-
S+
S
S-
M+
aaa
aaa
aa1
aa1
aa2
aa3
a1
a2
a3
baa1
baa2
baa3
ba1
ba3
b1
aaa
aa1
aa1
aa2
aa2
aa3
a1
a2
a3
baa2
baa3
ba1
ba3
b1
b3
aa1
aa1
aa2
aa2
aa3
a1
a2
a3
baa1
baa2
ba1
ba2
ba3
b2
caa1
aa1
aa2
aa2
aa3
a1
a2
a3
baa1
baa2
baa3
ba1
ba3
b1
b3
caa1
aa2
aa3
aa3
a1
a2
a3
a3
baa1
baa3
ba1
ba2
ba3
b2
b3
caa2
aa3
a1
a1
a2
a3
a3
baa1
baa2
baa3
ba2
ba3
b1
b2
caa1
caa2
a1
a2
a2
a3
baa1
baa2
baa2
baa3
ba1
ba2
ba3
b2
b3
caa1
caa2
M
a3
a3
baa1
baa1
baa2
baa3
baa3
ba1
ba2
ba3
b1
b2
b3
caa1
caa3
Very
weak -
M-
W+
W
W-
VW+
VW
VW-
baa1
baa1
baa2
baa2
baa3
ba1
ba2
ba2
ba3
b1
b2
b3
caa1
caa2
caa3
baa2
baa3
baa3
ba1
ba1
ba2
ba3
ba3
b1
b2
b3
b3
caa1
caa2
caa3
ba1
ba1
ba2
ba2
ba3
ba3
b1
b1
b2
b3
b3
caa1
caa2
caa2
caa3
ba3
ba3
b1
b1
b1
b2
b2
b3
b3
b3
caa1
caa1
caa2
caa2
caa3
b2
b2
b2
b3
b3
b3
b3
caa1
caa1
caa1
caa2
caa2
caa2
caa3
caa3
caa1
caa1
caa1
caa1
caa1
caa2
caa2
caa2
caa2
caa2
caa2
caa2
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
caa3
Rating of banks in weak systems are less sensitive to their individual financial metrics and more
reflective of changes in the macro environment:
Bank
Macro Profile
Financial Ratio Score
Initial Score
Bank A
Strong (S)
Moderate (M)
baa2
Bank B
Weak (W)
Moderate (M)
b1
14
Moody’s Loss Given Failure analysis
LGF analysis is applied to banks subject to operational resolution regimes; elsewhere, Moody’s
uses current notching
Operational Resolution Regime?
YES
NO
Loss Given Failure (“LGF”)
Notching
Senior unsecured rating: Adjusted BCA
Dated subordinated debt rating: Adjusted BCA -1
Liability Analysis

Specific legislation enabling orderly resolution of failed bank

Clear understanding of impact on depositors and other creditors

Reduced likelihood of support for senior creditors

Expectation that the largest, most systemically important banks are
typically resolved through support rather than bail-in

Statutory alternative is bankruptcy, but resolution approaches tend
to be defined only in a crisis
WHERE:
WHERE:
European Union, Norway, Liechtenstein, Switzerland, United States
(Title I and Title II), Others (esp. G-20) likely to follow
Everywhere else for now
Source: Moody’s
15
Moody’s Loss Given Failure (LGF) analysis
5 steps of LGF liability analysis
1
Failure balance sheet
Established under
liquidation principles
2
Preferred
Deposits
Non-preferred
Deposits
12%
Senior
Unsecured
(1)
4%
Sub debt
3%
Equity
Source:
Note (1)
Establish failure balance sheet
2
2.
Define loss rate
3
3.
Subordination
4
4.
Volume and subordination
5
5.
Notching up or down from adj. BCA
Loss rate = 8%
Subordination % Tangible Banking Assets
HIGHER RISK
81%
1
1.
Volume and subordination % Tangible Banking Assets
4
>=0% <6%
>=6% <8%
>=8% <10%
>=10% <12% >=12% <14% >=14% <16%
>=0% <6%
-1
-1
0
0
1
1
>=6% <8%
n/a
0
0
1
1
2
2
>=8% <10%
n/a
n/a
1
1
2
2
3
>=10% <12%
n/a
n/a
n/a
2
2
3
3
>=12%
n/a
n/a
n/a
n/a
3
3
3
3
>=16%
2
5
Moody’s
Example shows bail-in hierarchy under EU Bank Recovery and Resolution Direction; in Switzerland senior debt is ranks below nonpreferred deposits, and under the proposed German insolvency law as well
16
Support
Government support is assessed for each creditor class and
uplift derived using JDA
Government support
Preliminary
rating
assessments
1
2
Sovereign
rating
3
Probability
of support
4
Dependence
Credit
ratings
(Aaa – C)
Potential uplift
NEW
We will use sovereign
rating rather than
Systemic Support
Indicators (SSI)
95%–100%Government
backed
70%–95% Very high
50%–70% High
30%–50% Moderate
0%–30% Low
Preliminary
rating
assessment
SNS Bank
Adj. BCA: Ba1
Junior
deposits
Baa2 (+2)
Senior
unsecured
Baa3 (+1)
Subordinated
debt
Ba2 (-1)
Updated from current
100% only
90% Very high
70% High
50% Moderate
Sovereign
rating of NL
Probability
of support
Nothing within the JDA
range is a Rating
Committee judgment
Dependence
Moderate
Aaa
Moderate
Low
High
JDA range
Credit rating
+0 to +1
Baa1 (+1)
+0 to +1
Baa2 (+1)
+0
Baa3 (+0)
Senior and deposit rating of the largest banks will likely continue to benefit from 1 notch of systemic support
Source: Moody’s
17
Credit Suisse ratings
Government support
Deposit
+3
+1
CS AG Senior (OpCo)
+2
+1
1 Jan 2007
Aa3
Deposit
CS AG
Senior
A1
Tier 2
A2
Tier 1
11 Sep 2015
CSG
Senior
Instrument
Loss Given Failure
Pre-crisis (2007) vs. post-crisis (2015)
A3
Baa1
Standalone
Baa2
CSG Senior (HoldCo)
Baa3
Tier 2 CoCo
-1
-1
Ba1
Low Trigger AT1
-2
-1
Ba2
High Trigger AT1 (1)
-3
-1
-1
Greater ratings differentiation across capital structure of the bank depending on position in waterfall
Source:
Note 1:
Moody’s
Expected rating if such high trigger AT1 were rated by Moody’s
18
Swiss banks rating landscape
Impact of Moody’s methodology change
21
Aaa
Deposit rating (Sep ’15)
Sep-15
20
Aa1
Jan-15
Deposit rating (Jan ’15)
Standalone
Aa2
19
Senior unsecured (OpCo)
Senior unsecured (HoldCo)
18
Aa3
17
A1
16
A2
15
A3
14
Baa1
Baa2
13
Baa3
12
ZKB
Berner KB
Pictet
Raiffeisen
LGT
Julius Baer
EFG
BCV
Vontobel
CS
UBS
Valiant
BSI
While deposit ratings have been upgraded across the system, senior unsecured ratings are now
positioned higher or lower than before depending on additional loss absorbing capacity in resolution
19
C. S&P’s methodology (incl. ALAC)
20
S&P bank rating methodology framework
Bank Rating Methodology
BICRA
Methodology
MACRO
FACTORS
Economic risk score
BANK-SPECIFIC
FACTORS
EXTERNAL SUPPORT
Business position
Government support
Capital and earnings
Group support
SACP
Stand Alone
Credit Profile
ANCHOR
Stand Alone
Credit Profile
Industry risk score
Risk position
Setting the
ICR
Issuer Credit
Rating
ALAC
Funding and liquidity
BICRA
Banking Industry
Country Risk
Assessment
Score
Hybrid debt
and preferred
stock ratings
Senior
unsecured
ratings
Source: S&P.
21
RWA harmonisation
Reported vs. S&P RWAs of selected European banks
35%
63%
86%
130%
148%
231%
127%
245%
199%
144%
177%
160%
197%
178%
30%
300%
250%
Tier 1 ratio
200%
20%
150%
15%
100%
10%
S&P RWA / Reported RWA
25%
50%
5%
0%
0%
Left scale:
Right scale:
Tier 1 ratio
S&P RWA / Rep. RWA
S&P RAC ratio
Source: Last published S&P reports
S&P’s standardised approach on calculating risk-weights gives an indication on which banks are
more or less negatively affected by the RWA harmonisation exercise
22
S&P’s Additional Loss Absorbing Capacity (“ALAC”)

Concept: It takes into account the amount of loss absorbing debt available to protect senior creditors in
resolution
− Can be considered as a substitute to government support

Amount of uplift: S&P uplifts the Issuer Credit Rating (ICR) if there is a sufficient amount of ALAC available:
− 1 notch of uplift if ALAC > 5% of S&P’s RWA before diversification over next 2 years
− 2 notches of uplift if ALAC > 8% of S&P’s RWA before diversification over next 2 years
− Uplift limited to 1 notch for bank with Standalone Credit Profile (SACP) of “a+” or “a”, no uplift for bank with
SACP ≥ “aa-”

ALAC thresholds: The headline thresholds can be adjusted up or down due to qualitative factors
− Negative adjustment e.g. for maturity concentration within five years or pre-positioning requirements
(internal TLAC)
− Positive adjustment if S&P RWA includes business operations outside of scope of required bail-in debt

Eligible instruments: Must be able to absorb losses without triggering a default of the Issuer’s senior debt
− Includes amounts in excess of what contributes to the SACP via the Capital and Earnings assessment, and
− Legacy Tier 1 debt, Tier 2 debt, non-regulatory subordinated debt and HoldCo senior debt
− Residual maturity of one year
− Capital measured on a two-year forward-looking basis

Ratings impact: ALAC will substitute government support which is expected to be removed late 2015 or early
2016, we expect impact on ratings to be largely neutral to slightly negative for most banks
Source:
Standard & Poor’s, Credit Suisse
23
Illustration of ALAC concept
18%
17%
Other LAC
16%
AT1
CET1
Does not meet
requirement for
one ALAC notch
Meets
requirement for
one ALAC notch
"Very strong"
15%
14%
13%
No uplift
12%
11%
10%
9%
1.5%
"Strong"
3.0%
2.0%
No uplift
3.0%
+1 notch
ALAC uplift
1.5%
8%
2.5%
"Adequate"
+1 notch
for SACP
7%
6%
"Moderate"
5%
4%
8.0%
8.0%
8.0%
"Weak"
3%
2%
"Very weak"
1%
0%
Bank 1
Source:
Bank 2
Bank 3
Standard & Poor’s
24
ALAC threshold – qualitative adjustments
Source:
Standard & Poor’s as of 9 June 2015
25
3. Rating bank capital securities
26
Rating agencies
Instrument ratings and equity credit of bank capital instruments
Instrument
Notching
Equity credit(1)
Tier 2
(PONV)
Notching
Equity credit
Notching
Equity credit
Adj. BCA – 1
0%
(included in LGF)
SACP – 2
0%
(included in
ALAC)
VR – 1
0%
Tier 2
(“high trigger”)
Model-based
approach
100%
(excluded from
LGF)
SACP – 3(2)
100%(3)
VR – 4
50%
AT1
(“low trigger”)
Adj. BCA – 3
0%
(included in LGF)
SACP – 4
100%
VR – 5
50%
AT1
(“high trigger”)
Model-based
approach
100%
(excluded from
LGF)
SACP – 5(2)
100%
VR – 5
100%
Note 1:
Note 2:
Note 3:
Source:
Assumes bank operates in country with an operational resolution regimes
Assuming bank’s SACP is between “a+” and “bbb-”, and buffer to trigger between 3% and 7%
Subject to a minimum remaining maturity of 15 years if the SACP of the bank is at “bbb-” or higher, or 10 years if SACP is at “bb+” or lower
Moody’s, Standard & Poor’s, Fitch, based on Credit Suisse interpretation of their methodologies
27
Moody’s model-based going-concern CoCo rating approach
1

2
Implied model-based rating
Assumes distribution of the future capital ratio follows
normal distribution, defined by
Instrument
Old
New
“Plain-vanilla” Tier 2
-1
-1
- 2 to - 3
-4
-2
-3
− Bank’s CET1 ratio
− Standalone rating and its implied probability of failure, and
the capital ratio associated with such failure

The probability of a trigger breach mapped to a rating

One additional notch for a full principal write-off
Rating cap at level of non-viability security rating
Tier 2 CoCo
Additional Tier 1
Key factors
35
3

a1 / 9% CET1
Rating committee
judgement
30
Adjustments for security or bank specific
25
elements, e.g.
− Conversion at a 20
very low floor price
− Ability to issue new equity or take other
remedial actions 15
(deleveraging)
baa1 /
9% CET1
a1 / 13% CET1
Rating
Notching
adj. BCA: a1
CET1 ratio: 13%
Baa2
4 notches
adj. BCA: a1
CET1 ratio: 9%
Ba2
7 notches
adj. BCA: baa1
CET1 ratio: 9%
Ba3
5 notches
adj. BCA: baa1
CET1 ratio: 13%
Ba1
3 notches
10
5
Trigger
baa1 / 13%
CET1
“PONV”
0
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%11% 12%13%14% 15%16%17% 18%
28
Final remarks
Rating agencies are facing substantially stricter regulation
Reduce overreliance on credit ratings

Basel paper on revision of RWAs proposes that bank and corporate exposures are no longer risk-weighted by reference to the
external credit rating, but risk-weights should instead be based on a look-up table
− Banks exposure: 30% to 300% on the basis of a capital adequacy ratio and an asset quality ratio.
− Corporate exposures: 60% to 300% on the basis of revenue and leverage

Avoid use of rating triggers in corporate and structured finance ratings
Make credit rating agencies more accountable for their actions

Rating agencies must publicly disclose how their ratings have performed over time and must provide additional information in
their analyses so investors can make better decisions

New rules to make rating agencies more accountable for their actions as ratings are not just simple opinions, in order to ensure
that a rating agency can be held liable in case it infringes intentionally or with gross negligence

Use of an additional symbol with ratings for structured finance instruments in order to distinguish them from other rating
categories
Conflict of interest and encourage competition

Mandatory rotation of lead analyst and person approving the rating, with a cooling off period

Clear split between analytical teams and commercial side

Increase topical research for fee-paying investors

Re-evaluation of ratings assigned by an analyst who leaves the rating agency to work for the rated entity

EU / ESMA tries to support competition amongst rating agencies and is encouraging bank issuers with two or more ratings to
use a smaller rating agencies with less than 10% market share
29
Moody’s default study
Average Cumulative Credit Loss Rates by Letter Rating, 1982 - 2013*
Year 1
Year 2
Year 3
Year 4
Year 5
Aaa
0.00%
0.02%
0.02%
0.02%
0.03%
Aa
0.02%
0.05%
0.09%
0.16%
0.26%
A
0.05%
0.13%
0.27%
0.44%
0.61%
Baa
0.11%
0.32%
0.56%
0.82%
1.11%
Ba
0.63%
1.83%
3.32%
4.98%
6.39%
B
2.41%
5.85%
9.29%
12.27%
14.87%
10.00%
17.01%
22.67%
27.10%
30.98%
Investment Grade
0.06%
0.17%
0.32%
0.49%
0.67%
Speculative Grade
2.89%
6.00%
8.97%
11.57%
13.77%
All Rated
1.14%
2.34%
3.45%
4.38%
5.16%
Caa-C
* Based on average default rates and senior unsecured bond recoveries measured on issuer-weighted basis
Moody’s default rates per rating category indicate that ratings have been relatively credible over the last 30 years
Source:
Moody’s
30
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Bank Debt Ratings in the New Bail-in World

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