DBRS Requests Comments on Rating Subordinated, Hybrids and Preferred Bank Capital Securities

DBRS is requesting comments on a proposed methodology released today that would be used in the rating of capital securities issued by banks that are either subordinated or that have unique convertibility terms (including contingent capital features). Market participants are asked to submit comments on the proposal to DBRSBankMethodology_Comments@DBRS.com on or before May 10, 2013. Following the review and evaluation of all submissions, DBRS will publish a final version of this methodology.

Note that the proposed criteria as titled represents a merger of three outstanding DBRS banking criteria: (i) Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments; (ii) Rating Bank Subordinated Debt & Hybrid Instruments with Contingent Risks; and (iii) Rating Bank Preferred Shares & Equivalent Hybrids.

While we are open to any comments, we draw attention to three major areas, two of which are written as changes in the proposed document and one consideration for change, which has not been included in the document at this time:

(1) Present criteria dictate that bank preferred shares are typically rated three to five notches below the issuer’s intrinsic assessment. Based on further assessing the impact of notching versus POD (“probability of default”) levels, the request for comment document changes this to a standard three notches. We are also asking for comments on whether DBRS should retain the flexibility to have certain bank preferred ratings notched up by one notch versus the standard notching where there are unique positive characteristics for individual banks, or if this ability should be removed. The wording in the proposed criteria as released still provides this ability.

(2) A second change relates to the notching process that DBRS would use for contingent capital instruments. The proposed criteria within this April 5th, 2013 document provide more detail relative to the current DBRS criteria.

(3) As is the case with the present criteria, the request for comment document continues to present that normal subordinate debt instruments issued by banks that are defined by DBRS as systemically important would generally receive the identical notching benefit of typically a one-notch uplift due to external / government support that is given to deposits and senior unsecured debt. In recent times, there appears to be growing skepticism regarding governments’ willingness to support subordinated debt when dealing with systemically important banks. Our final decision on this issue could maintain the status quo; or it could result in all subordinate debt being notched from the intrinsic assessment level; or there could be a combination of the above based on the relevant legal framework, resolution schemes, and government policies for each country and banks involved.

Notes:
DBRS criteria and methodologies are publicly available on its website www.dbrs.com under Methodologies.