Rothschild Caesarea Center
for Capital Markets & Risk Management
Redesigning Bank Ratings Criteria
And Its Consequences
Emmanuel Volland
Senior Director, Financial Institutions
emmanuel_volland@standardandpoors.com
April 3, 2012
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Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
Our Objective And What The Criteria Provide
Objective: To create an integrated, globally consistent framework, that:
• Builds on what we knew and have learned
• Recognizes the impact of industry and macro-economic factors
• Incorporates the incremental criteria changes we have made
• Utilizes the analytical tools we have developed
The revised criteria provide:
• An intuitive framework that guides fundamental analysis
• Greater clarity on the building blocks of S&P’s bank ratings
– BICRA, used to assess the industry and economic factors
– Analysis of bank specific business and financial risks
– Potential for extraordinary support (Government / Parental)
– Peer review
2.
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3.
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BICRA – Main Factors
Economic Risk
Industry Risk
A. Economic resilience
A. Institutional framework
• Economic Structure and stability
• Macroeconomic policy flexibility
• Political Risk
• Banking regulation and supervision
• Regulatory track record
• Governance and transparency
B. Economic imbalances
• Private-sector credit growth
• Residential real estate prices
• Equity prices
• Current-account balance and external debt position
B. Competitive dynamics
• Risk appetite
• Industry stability
• Market distortions
C. Credit risk in the economy
C. System-wide funding
• Private-sector debt capacity and leverage
• Lending and underwriting standards
• Payment culture and rule of law
• Sovereign government credit stress
• Core customer deposits
• External funding
• Domestic debt capital markets
• Government role
Source: Banking Industry Country Risk Assessment Methodology And Assumptions
4.
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BICRA Outcomes
5.
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The Anchor
Table 2 - Determining The Anchor SACP From Economic Risk And Industry Risk
Economic risk
1
2
3
4
5
6
7
8
9
10
1
a
a
a-
bbb+
bbb+
bbb
2
a
a-
a-
bbb+
bbb
bbb
bbb-
3
a-
a-
bbb+
bbb+
bbb
bbb-
bbb-
bb+
4
bbb+
bbb+
bbb+
bbb
bbb
bbb-
bb+
bb
bb
5
bbb+
bbb
bbb
bbb
bbb-
bbb-
bb+
bb
bb-
b+
6
bbb
bbb
bbb-
bbb-
bbb-
bb+
bb
bb
bb-
b+
bbb-
bbb-
bb+
bb+
bb
bb
bb-
b+
b+
bb+
bb
bb
bb
bb-
bb-
b+
b
bb
bb-
bb-
b+
b+
b+
b
b+
b+
b+
b
b
b-
Industry risk
7
8
9
10
Source: Banks: Rating Methodology And Assumptions
6.
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7.
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SACP – Bank Specific Factors (1)
Source: Banks: Rating Methodology And Assumptions
8.
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SACP – Bank Specific Factors (2)
Source: Banks: Rating Methodology And Assumptions
9.
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SACP Illustration
Bank Specific Factors
BICRA
SACP
a
abbb+
bbb
+1
No
change
bbb
-1
No
change
bbb
bbbbb+
10.
Anchor
Business
Position
Capital and
Earnings
Risk
Position
Funding
Liquidity
SACP
bbb
Strong
Adequate
Moderate
Average
Adequate
bbb
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Peer Group Definition
SACP Factor
Comparative group
Business Position
Banks with similar Industry Risk
Capital and Earnings
All banks globally
Risk Position
Banks with similar Economic Risk and product mix
Funding & Liquidity
Funding: all banks in a country
Liquidity: all banks globally
Source: Table 4 of Banks: Rating Methodology And Assumptions
11.
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Business Position Components
Table 5 - Business Position Subfactors And Indicators
Subfactors
Explanation
Indicators
Business
stability
The stability or fragility of a bank's
franchise
Revenue stability, market shares, and the
customer base
Concentration
or diversity
The concentration or diversification
of business activities
Contribution of different business lines and
geographies to overall revenue
Management
and corporate
strategy
The quality of management,
strategy, and corporate governance
Strategic positioning, operational
effectiveness, financial management, and
governance and financial policies
Source: Banks: Rating Methodology And Assumptions
12.
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Business Position
Table 6 - Business Position Assessment
Qualifier
What it means
Very Strong
A bank’s business operations make it better placed to withstand adverse operating
conditions than the industry risk score indicates.
Strong
A bank’s business operations make it somewhat less vulnerable to adverse operating
conditions than the industry risk score indicated.
Adequate
A bank’s business operations are representative of the industry risk score.
Moderate
A bank’s business operations make it more vulnerable to adverse operating conditions
than the industry risk score indicates.
Weak*
A bank’s business operations make it significantly more vulnerable to operating conditions
than the industry risk score indicates.
Very Weak
The industry risk score is not representative of a bank’s vulnerability to adverse operating
conditions. (This category applies only in exceptional circumstances.)
*The impact on the SACP is a deduction of two or three notches. Three notches applies only in the fragmented
industries with a large number of smaller banks that all have weaker-than average industry risk. Deducting two or three
notches from the SACP for a weak classification helps to differentiate such banks further.
Source: Banks: Rating Methodology And Assumptions
13.
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Capital & Earnings Components
Regulatory capital
Risk Adjusted Capital Ratio
Quality of capital & earnings
Earnings capacity
14.
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RAC Ratio Is Our Key Measure of Capitalization
Borderline ratios are further informed by quality of capital and earnings
15.
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Risk Position Components
Growth & changes in exposure
Risk concentration & risk
diversification
Complexity
Risks not covered by RACF
Loss experience and
expectations
16.
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Funding
Table 15 – Funding Assessment
Descriptor
What it means
Above Average
A bank exhibits stronger funding metrics than the average for all banks in
the same country.
Average
A bank exhibits similar funding metrics than the average for all banks in
the same country.
Below Average
A bank exhibits weaker funding metrics than the average for all banks in
the same country.
Source: Banks: Rating Methodology And Assumptions
17.
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Liquidity
Table 16 – Liquidity Assessment: Strong Adequate, Moderate, Weak, Very Weak
Qualifier
What it means
Strong
The bank is able and prepared to successfully manage its liquidity, and can survive
under stressful conditions for 12 months without significant – generally less than
10% - dependence on central bank funding.
Adequate
The bank is able and prepared to successfully manage its liquidity, and can likely
survive under stressful conditions for more than six months, but with a possibility
that dependence on central bank funding can become significant – generally less
than 25% - after the first six months.
Moderate
The bank is less able and prepared to manage its liquidity. It is less likely that the
bank can survive under adverse conditions for more than six months without heavy
dependence – up to 25%-50% - on the central bank.
Weak
The bank is unable or unprepared to manage without extraordinary central bank
support, which is greater than 50% and is likely to be available for as long as
needed to correct imbalances.
Very Weak
The bank is unable or unprepared to manage its liquidity in adverse economic and
market conditions without extraordinary central bank support, which is available and
more than 50% but may be finite.
Source: Banks: Rating Methodology And Assumptions
18.
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19.
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Factoring Extraordinary Support Into The SACP
Source: Banks: Rating Methodology And Assumptions
20.
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Determining Systemic Importance
Table 18: Systemic Importance
Descriptor
Observations
High systemic
importance
A loss of confidence in a bank is likely to lead to a loss of confidence in the entire
national banking system. In particular, a default of a bank’s senior unsecured
obligations is likely to weaken the country's financial system, limit the availability of
credit for the private sector and trigger a significant financial stress at several other
financial institutions.
Moderate
systemic
importance
A loss of confidence in a bank may lead to a loss of confidence in the entire
banking system. In particular, a default on a bank’s senior unsecured obligations
can weaken the financial system and limit the supply of credit for the private sector.
Low systemic
importance
A bank has low systemic importance when it does not fit the criteria for high or
moderate systemic importance. The majority of banks in a banking industry are
likely to be in this category. However, if the market is particularly concentrated,
fewer banks are likely to have low systemic importance.
Source: Banks: Rating Methodology And Assumptions
21.
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Governments Tendency to Bail Out
Source: Banks: Rating Methodology And Assumptions
22.
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Likelihood Of Extraordinary Government Support In The Future
Table 20: Likelihood Of Extraordinary Government Support In The Future
Government’s tendency to support
private-sector commercial banks
Systemic importance
Highly
supportive
Supportive
High
High (table 21)
Moderately high
(table 22)
Low
Moderate
Moderately high (table
22)
Moderate (table 23)
Low
Low
Low
Low
Low
Source: Banks: Rating Methodology And Assumptions
23.
Uncertain
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Moderately High Likelihood of Extraordinary Government Support
Source: Banks: Rating Methodology And Assumptions
24.
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Group Rating Methodology
Table 1
Summary Table Of Associating An Entity's Group Status With An Indicative Long-Term Rating
Group status
Brief definition
Indicative longterm rating
Core
Integral to the group's current identity and future strategy. The rest
of the group is likely to support these entities under any
foreseeable circumstances.
Generally at
GCP
Highly
strategic
Almost integral to the group's current identity and future strategy.
The rest of the group is likely to support these subsidiaries under
almost all foreseeable circumstances.
Generally one
notch below
GCP
Strategically
important
Less integral to the group than highly strategic subsidiaries. The
rest of the group is likely to provide additional liquidity, capital, or
risk transfer in most foreseeable circumstances. However, some
factors raise doubts about the extent of group support.
Generally three
notches above
SACP
Moderately
strategic
Not important enough to warrant additional liquidity, capital, or risk
transfer support from the rest of the group in some foreseeable
circumstances. Nevertheless, there is potential for some minimal
support from the group.
Generally one
notch above
SACP
Nonstrategic
No strategic importance to the group. These subsidiaries could be
sold in the near to medium term.
Generally at
SACP
*ICR—Issuer credit rating. It is subject to sovereign rating constraints and application of government support criteria. GCP—Group credit profile. SACP—
Stand-alone credit profile.
Source: Standard & Poor's.
25.
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Overview Of Important Criteria Publications
• Credit Stability Criteria, May 3, 2010
• Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
• Bank Capital Methodology And Assumptions, Dec. 6, 2010
• Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
• Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011
• Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
• Group Rating Methodology And Assumptions, Nov. 9, 2011
• Table Of Contents: Standard & Poor's Financial Institutions Ratings Criteria, Nov. 11, 2011
26.
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