REGULATION aimed at removing taxpayer support for banks that are “too big to fail” could lead to ratings downgrades for 177 major global banks this year, ratings agency Moody’s has warned. The reforms will allow even big firms to fail and impose costs on bondholders.
Regulators’ determination to tackle the problem of taxpayer bail-outs with special new resolution and bankruptcy procedures will raise borrowing costs for dozens of banks as implicit guarantees are axed, the agency said as it began a review into banks’ subordinated debt ratings.
The review excludes UK banks because the UK government has already “demonstrated both its ability and willingness to impose losses” on junior bondholders, says Moody’s, and “our ratings already reflect these actions”.
The agency’s position on the UK contradicts claims that British banks still benefit from a £100bn “implicit subsidy” from government.
The review comes as regulators around the world attempt to craft rules that enable failing banks to be wound up rather than bailed out, most through the use of a “resolution authority” to take over collapsing banks and impose losses on creditors, not just equity holders.
But despite tough rhetoric, particularly from German Chancellor Angela Merkel, Moody’s says that most jurisdictions have yet to make any progress in eroding the state guarantee even for junior debt.
In the US, this guarantee affects ratings for all major banks. Bank of America’s subordinated debt rating would be five notches lower without the guarantee and Citigroup’s would be three notches lower (see graphic, below).
Spain, Japan and Italy are some of the other worst-affected jurisdictions: Mizuho Bank would see its junior debt rating fall six notches, for example.
As regulations change, however, Moody’s plans to adjust banks’ ratings in line with governments’ willingness to impose losses and the workability of their plans.
The agency’s analysis also estimates the average ratings “uplift” on senior debt from government support.
The UK ranks in the middle of the pack, with 2.6 notches worth of benefit for banks’ senior debt.
The US’s “implicit guarantee” for senior debt is worth 2.2 notches, while Spain’s is worth 2.7 notches and Japan’s is worth 4.1 notches.