Tuesday, June 26, 2012

Moody's down-grades 15 banks

On June 21, 2012, Moody's has downgraded 15 financial groups with global capital markets operations.


The central reasoning for the above down-gradings of the financial institutions is their capital market activities and, thereby, their significant exposure to the volatility and risk of outsized losses, i.e tail risk.

More specifically, Moody’s analysis is carried out in 3 major steps:

1. Appreciation of standalone credit worthiness

According to Moody’s methodology, the standalone credit worthiness of a financial institution depends on 6 key factors:

  • Size of capital markets activities: Both relative and absolute sizes count here. Firms that have a particular high portion of capital market revenues as compared to its total revenues include Barclays (40 %), Crédit Suisse (53 %), Deutsche Bank (54 %), Goldman Sachs (87 %), and Morgan Stanley (52 %).
  • Volatility of firm-wide earnings (incorporating earnings from non-capital markets businesses): Firms showing a particularly high volatility of earnings include Crédit Suisse (roughly 600 %), UBS (700 %), Citigroup (700 %), and Royal Bank of Scotland (700 %).
  • Size and resilience of shock absorbers such as pre-tax earnings, capital buffers, retail and commercial banking franchises, global wealth management or asset management businesses, and specialized businesses such as payment services and transaction processing.
  • Relative strength and or weakness of funding profiles: Moody’s analyzes the degree to which a firm relies on wholesale funding, the firm’s liquidity position (namely the average maturity of its liabilities), the firm’s net stable funding ratio (= core funding / illiquid assets), and the firm’s absolute wholesale funding requirements. To give an example, Moody’s points out that the major French banks BNP, Crédit Agricole, and Société Générale have, compared to their major competitors, a relatively weak funding position as their net stable funding ratios are 75 %, 79 %, and 79 % respectively 
  • Exposure to the ongoing Euro crisis and the weak European operating environment
  • Other considerations such as legacy assets, risk management and control, and strategy

2. Appreciation of systemic government support

In a nutshell, Moody’s considers that government support is likely to become less certain and predictable over time, due to ongoing regulatory reform projects in many developed countries. As a matter of fact, the analysts identify a tendency towards more flexibility and limited support in a stress scenario.

However, the rating agency also recognizes that today’s weak economic environment makes many countries still stick to governmental support schemes for its financial sector.

3. Appreciation of firm-specific considerations

In this section, Moody’s applies the above criteria to each financial institution and assesses the criteria in favor of a rating downgrade against any mitigating elements.


  • Moody's Press Release – Moody's downgrades firms with global capital markets operations – June 21, 2012
  • Moody's Special Comment – Key Drivers of Rating Actions on Firms with Global Capital Markets Operations – June 21, 2012