Bangkok--7 Aug--Moody's
Moody's Investors Service has released -- in tandem -- an update of its ongoing review of its bank rating methodology
and a new report summarizing its methodology for formulating local currency deposit ceilings. The two are linked because of the important role played by local currency deposit ceilings in Moody's assessment of bank credit risk.
According to Moody's Chief Credit Officer for Financial Institutions David Fanger, Moody's intends "to allow the joint-default analysis (JDA) framework to comprise all major forms of external support for banks -- not just systemic support -- when assigning deposit ratings." He confirms that this had been decided after reviewing extensive feedback from credit market participants.
In addition, the rating agency announced that an updated methodology for bank financial strength ratings (BFSRs), a key component of its bank deposit rating methodology, will be published next month as a request for comment. "After reviewing market feedback," Mr. Fanger says, "a final BFSR / bank deposit methodology will be issued. Moody's will then
evaluate all published bank ratings in light of the new standards on a country-by-country basis starting in November."
"To summarize the proposed approach," he says, "Moody's bank ratings will continue to be determined through judgment, not models. Our intention is to be more transparent about the judgments we are making and more consistent in their impact on rating outcomes."
Beyond the BFSRs' expression of a bank's intrinsic financial fundamentals, and in order to fully reflect the risk that a depositor might suffer losses, he adds, one must factor in the ability and willingness of a government or monetary authority to bail out a floundering bank.
Consequently, Moody's introduced the local currency deposit ceiling (LCDC) in 2005 as a measure of a government's ability to support a troubled deposit-taking institution. According to Vincent Truglia, managing director of Moody's Sovereign Risk Unit, "the LCDC is derived from a country's or jurisdiction's local currency guideline, and can be no higher than the local currency guideline and no lower than the government's local currency bond rating." In situations where a central bank has nearly unfettered ability to create liquidity, the LCDC is at or close to the local currency guideline.
The analyst explains that the LCDC captures the risk that a national government or central bank would be unable to prevent an important bank from defaulting upon local currency deposits, either due to limited local currency resources or to the imposition of a domestic deposit freeze.
Mr. Truglia points out that it is very rare to witness important banks defaulting on their local currency deposits. "Because of the crisis in confidence this might generate in the nation's financial system, perhaps even spilling into the foreign exchange markets," the analyst states, "systemically vital banks can depend on the support of the country's central bank."
Mr. Truglia notes that there are some situations where the central bank may not have full and discretionary control of the national currency: (a) when a central bank is restrained by a currency board, which fixes the national currency to a foreign currency that acts as an anchor; (b) operational shortcomings, perhaps leading to tardy intervention; and (c) legal dollarization and currency substitution when there is a high degree of dollarization but no formal linkage.
The reports are titled "Bank Joint Default Analysis: Rating Methodology Update" and "The Local Currency Deposit Ceiling."
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New York
Gregory W. Bauer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
David Fanger
Chief Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653