DBRS Releases Updated Criteria for Bank Capital Securities with Ratings Impact

DBRS has published the “Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities.” This Criteria merges and updates four presently outstanding DBRS banking criteria:

1. Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments (April 12, 2010);
2. Bank and Bank Holding Company Trust Preferred Securities (May 18, 2006);
3. Rating Bank Subordinated Debt & Hybrid Instruments with Contingent Risks (April 12, 2010);
4. Rating Bank Preferred Shares & Equivalent Hybrids (June 29, 2009).

The criteria was submitted for public consultation from 5th April to 10th May, 2013. Following the consultation the only substantial change made to the final criteria has been the removal of references which explicitly allowed for a less than 3 notch difference between a bank’s intrinsic assessment and its preferred share ratings. There were also numerous non-substantial changes, mainly intended to provide additional clarity.

There are a number of notable changes compared to the four existing criteria documents.

One relates to the rating of bank preferred shares (and instruments that can convert into preferred shares). The former criteria typically rated preferred shares 3 to 5 notches below the issuer’s Intrinsic Assessment (IA) with the notching increasing for lower rated banks. This has been changed to a standard 3 notches across all rating categories.

A second change relates to the notching process that DBRS applies to contingent capital instruments (“CoCos”). The proposed criteria are clearer and provide more detail.

A third notable change is to recognise more explicitly the increased likelihood in some jurisdictions that subordinated debt instruments (subdebt) and debt related hybrid securities (hybrids) may not benefit from systemic support to the same degree as uninsured deposits and senior unsecured debt. DBRS acknowledges that in many jurisdictions governments are more disposed to impose losses on subdebt and hybrid holders than in the past. As a result, this methodology allows for the use of one of two approaches for subdebt and hybrids depending on DBRS’s assessment of the systemic support and the potential for losses to be imposed on subdebt holders in different jurisdictions.

The change in the notching for preferred shares and instruments which can convert into preferred shares has implications for the ratings of these instruments for certain banking organisations. The impact of this change on existing ratings will be published separately.

Notes:

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

For more information on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS's rating definitions and the terms of use of such ratings are available at www.dbrs.com.