Ratings agency Standard & Poor’s (S&P) recently concluded its request for comment on incorporating additional loss-absorbing capacity (ALAC) into its bank rating methodology. It was an especially popular topic on a webcast today.
Today’s webcast was titled “Negative Rating Actions on Certain European Banks – Will Similar Trends Emerge in Asia Pacific?” It focussed on the ratings impact of government support for bank recovery in Europe. But S&P’s ALAC methodology remained a topic of discussion throughout the webcast.
Its proposed ALAC methodology would take into account buffers of subordinated debt and other instruments that can provide credit enhancement to unsecured creditors.
S&P recognises ALAC as an alternative to government support, said Richard Barnes, senior director of Standard & Poor’s financial institutions team in EMEA, speaking on a webcast today. It can improve the creditworthiness of senior unsecured debt by acting as a buffer before it gets called upon.
The ratings agency doesn’t envisage counting both government support and ALAC. It may choose the higher of either government support or ALAC – but not both, although that hasn’t yet been finalised.
According to the request for comment, banks with five percent of their S&P risk-weighted assets in eligible instruments may have their rating lifted by one notch above their standalone credit profiles. If they had eight percent, that could move up to two notches.
And while the focus of the ALAC methodology was mostly about consolidated groups, they are looking at intra-group positioning as they move into their final criteria.
Speakers on the webcast emphasised throughout that the ALAC methodology is still at the request for comment stage; none of this is final. While the request itself has closed, S&P will now take a close look at the respondents’ comments and in due course will publish new criteria.
Re-upgrade potential?
Although ALAC is not yet part of S&P’s methodology, Barnes said that there was some flexibility to notch up in the final rating if banks have substantial buffers of ALAC.
That means the European banks in Austria, Germany, Switzerland and the UK that were downgraded last week are unlikely to get upgraded immediately following the new methodology. “We are obviously keen to avoid unnecessary ratings volatility that stems purely from timing and methodology changes,” said Barnes.
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