Moody's revises its rating methodology for banks
Moody's revises its rating methodology for banks. Reuters

Moody's Investors Service is reviewing how it reflects risk of bank performance in rating securitisations globally, in conjunction with proposed changes to its bank rating methodology.

These risks coincide with various roles banks play in structured transactions, according to a Moody's report. The risk of default is considered first followed by unsecured obligations.

"The proposed changes to our bank rating methodology will improve insight into how different regulatory approaches to bank resolutions may impact a bank's ability to fund obligations and perform essential functions in structured finance transactions", said Neal Shah, a Moody's managing director.

The proposals follow a change in public policy in recent years favouring "resolution regimes", under which bank regulators can bail-in debt instruments of undercapitalised banks without invoking bankruptcy, allowing other banking operations to continue uninterrupted, Moody's said.

The rating agency said depending on the resolution regime and the role of the banks in a securitisation, there are four reference points the agency is considering to reflect bank performance risk which are listed, from highest to lowest risk:

1. The risk that a bank will default or require extraordinary support to avoid a default on one or more of its debt obligations, as indicated by the bank's adjusted baseline credit assessment.

2. The risk of a bank's senior unsecured obligations, as indicated by its senior unsecured debt rating.

3. The risk of bank deposits, as indicated by the bank's deposit rating, which measures the risk of a bank's most junior class of deposits. Under the proposed bank rating methodology, certain bail-in regimes and depositor preference rules can lead to different rating levels for senior unsecured debt and deposits.

4. The risk that a bail-in or other actions taken by regulators in resolving a failed bank will prove insufficient to recapitalise a bank or otherwise continue the bank's core operations and no other resolution tool, such as a transfer to another bank, serves to save the failed bank's core activities.