Bank Debt Ratings in the New Bail-in World
Transcription
Bank Debt Ratings in the New Bail-in World
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 Marketing Material – It is not Investment Research Bank Insolvency Ordinance 1 Nov 2012 Bank Recovery and Resolution Directive Sub debt: 1 Jan 2015 Senior: 1 Jan 2016 3 © Credit Suisse AG and/or its affiliates Bank Insolvency Ordinance Bank Recovery and Resolution Directive Resolution Mechanism Act Common Equity Tier 1 (buffer) Common Equity Tier 1 (buffer) 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) Common Equity Tier 1 (min) 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 Marketing Material – It is not Investment Research 4 © Credit Suisse AG and/or its affiliates 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) Marketing Material – It is not Investment Research 5 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 7 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 8 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 11 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 12 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 13 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 14 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 15 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 16 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 17 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 18 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 19 © Credit Suisse AG and/or its affiliates 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. Marketing Material – It is not Investment Research 21 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 22 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 23 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 24 © Credit Suisse AG and/or its affiliates ALAC threshold – qualitative adjustments Source: Standard & Poor’s as of 9 June 2015 Marketing Material – It is not Investment Research 25 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 27 © Credit Suisse AG and/or its affiliates 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% Marketing Material – It is not Investment Research 28 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 29 © Credit Suisse AG and/or its affiliates 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 Marketing Material – It is not Investment Research 30 © Credit Suisse AG and/or its affiliates Q&A Marketing Material – It is not Investment Research 31 © Credit Suisse AG and/or its affiliates Credit does not tax advice. 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