Tuesday, 17 December 2013

Bank Ratings and the Role of Government Support

The credit crisis changed the way S&P's factors government support into its bank ratings. Going back to 2008 at the height of the credit crisis, it is fair to say that many people were surprised at the level of support given to banks not just in the US but globally. Until that time, government support of US banks was not explicitly incorporated into the ratings given to those banks. But towards the end of 2008 and following a series of government bank support initiatives, the extraordinary support given to the large, systemically important banks was included in the ratings. 

In November 2011 new bank rating criteria was introduced, making the criteria more transparent, and including for the first time explicit reference to government support. The Stand Alone Credit Profile (SACP) was also revised and tightened and altered to include either group support or government support. Governments were identified as 'high support' or 'supporting' (as in the US) in certain instances and banks were defined as being of high, moderate or low systemic importance. 

The potential for extraordinary government support continues to be factored in to the ratings of high systemic importance banks in the US. This is because despite progress made under the Dodd-Frank Act with regards to liquidations, S&P's believes that a crisis today would still require some form of government support to minimise contagion risk. However, there is the possibility that support could be removed from the ratings of the banks' holding companies and depending on how regulation evolves on resolution, support may be removed from the ratings of high systemic importance banks. Government support is not set to be removed from the ratings assigned to operating companies though.

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