In a new report on banking analysis, Moody’s Investors Service describes how the global financial crisis is affecting the ability of national governments and their central banks to support their banking systems in certain markets. The rating agency reaffirms its view that most governments are at least as likely, if not more likely, to support their banking systems as they are to service their own debts.
However, the rating agency also explains that the erosion in underlying credit fundamentals and reduced policy flexibility of many governments have prompted a review of the level of systemic support for banks in countries with sovereign ratings below the triple-A level. As a result, the rating agency expects to take rating actions on bank debt and deposit ratings of some banks in non-Aaa rated countries.
Throughout the financial crisis, nearly all governments have aggressively supported their banking systems when under stress which is fully reflected in Moody’s bank analysis. However, the prolonged and widespread nature of the crisis has stretched government resources and restricted their policy options in supporting banks. These restrictions include preserving countries’ fiscal health, currencies, and financial markets. They increase risks for bank creditors compared to the pre-crisis world that focused on the avoidance of a systemic bank crisis triggered by individual institutions’ failure.
“As the financial crisis broadens and continues, the capacity of a central bank to support its banks converges with, and is constrained by, the government’s own debt capacity,” says Moody’s Managing Director Greg Bauer. “Even central banks are limited in their ability to ‘print money’ to support their banking systems because of onerous consequences such as high inflation or reduced access to capital markets.”
The report describes parameters that Moody’s considers when assessing a government’s ability to support its banks. These include the size of the banking system in relation to government resources, the level of stress in the banking system, the foreign currency obligations of the banking systems relative to the government’s own foreign exchange resources, and changes to government political patterns and priorities.
Moody’s will consider over time government support on a country-by-country basis, and announce rating reviews and rating adjustments for banks when appropriate. In some cases, such as for certain central European countries, Moody’s has already considered practical government limitations to support banks as part of recent rating actions.
Banks ratings in Aaa-rated countries, and in a handful of countries rated below Aaa, will not be affected by this analysis as these governments have a high ability to support their banking systems. Banks with comparatively high stand-alone financial strength or strong parental support in non-Aaa countries will continue to be rated above the government level.
The report titled “Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries” is available on Moodys.com.
–www.theasianbanker.com (May 12 2009)–
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Asian Banker
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