Can banks, or at least their ratings, survive without extraordinary governmental support?
Moody’s has just published a report on the phasing out of UK government assistance for British banks — that would be things like the Credit Guarantee and Special Liquidity schemes started in the midst of the financial crisis.
By the agency’s reckoning the withdrawal process should take one to three years, and the wind-down could endanger the ratings of some (weaker) banks. To wit:
However, there may be some institutions that have not sufficiently improved their standalone strength to offset the phasing-out of extraordinary systemic support, and the senior debt and deposit ratings of these institutions could be downgraded in line with our “normalised” view of support and the weaker standalone financial strength of the institution.
At the moment the government support Moody’s factors into its ratings creates the following uplift — by ratings notch — for the UK’s big banks:
If that doesn’t seem very high to you, it’s because even prior to the crisis Moody’s had already assumed a degree of support for the larger banks.
In contrast, for smaller banks, the support uplift is much more significant. In fact, seven of the 10 banks in the below table would be rated below investment-grade without it:
Nevertheless, Moody’s still thinks of Britain as a “low-support country” :
Prior to the crisis, we categorised the UK as a “low-support country” in light of past government actions and stated government and regulatory intentions regarding support for banks. As a result, we incorporated little or no probability of systemic support into the senior debt and deposit ratings of small banks or those of building societies (apart from Nationwide), although we incorporated the expectation of cooperative sector support (of up to one notch) into the ratings of some of the smaller building societies. In contrast, we assigned very high probabilities of systemic support to the large clearing banks, given their dominant roles in the UK banking sector, leading to two or more notches of uplift (see “Notches of Rating Uplift from Support Assumptions under JDA” in Table 1) . . .The provision of support [during the crisis] . . . did not change our view of the UK as a “low-support country” over the medium term, particularly as we had always incorporated higher support assumptions for the large clearing banks.
What would a “high-support” country look like, we hear you ask?
Check out the below chart, from Deutsche Bank’s fixed income team:
That’s the difference between ratings assuming support and ratings on a stand-alone basis in January 2008 and now. You can see how government support has increasingly come to prop up bank ratings — especially for financial institutions in Ireland and Austria.
What will Moody’s say about them, we wonder?
(H/T Gary Jenkins)
Related link:
Next up for Europe, covered bond catastrophe? – FT Alphaville