HALF the world’s biggest banks could face a credit rating downgrade from Standard & Poor’s, the US ratings agency said yesterday as it announced proposals to review the way it rates the industry.
In a sign of the pressure on agencies to respond to criticism that they failed to flag up weaknesses in bank balance sheets prior to the financial crisis, S&P’s stringent new criteria would consider not only a bank’s stand-alone credit profile but also that of its parent group or government.
The criteria, a “significant change” from current rating methodology, would also see greater scrutiny of retained earnings and their capacity to cover anticipated losses, and greater emphasis on risks related to complex off-balance-sheet derivatives.
“We are now emphasising structural changes in the economy, a bank’s business position, and its financial strength as key drivers of changes in creditworthiness,” it said.
In a trial assessment of 138 banks, more than 40 per cent saw their stand-alone credit rating lose one notch or more. “For roughly half of the largest banks, the results show that the proposed criteria would result in downgrades,” it said.
Fewer than a fifth of banks currently rated A-1 or higher would see a downgrade while only about 15 per cent of long-term issuer credit ratings were significantly affected.
The new rules would apply to retail, commercial and corporate and investment banks.