DBRS Releases Updated Criteria: Support Assessments for Banks and Banking Organisations

DBRS has today published an updated Criteria: Support Assessments for Banks and Banking Organisations that is effective as of today. This methodology supersedes the existing methodology published on 24 January, 2014.

This criteria addresses in detail how DBRS evaluates and incorporates two forms of support into its ratings of banks, banking organisations and their subsidiaries, and certain other financial institutions: internal support from within a banking organisation and systemic support from governments. The changes are largely for clarification and to update the language to reflect the evolving regulatory environment. Accordingly, this update has not resulted in any rating changes or other rating actions. Given the limited changes, this update was not published with a request for comment.

Although the Criteria did not change materially, DBRS recognizes that the environment is quickly evolving towards less predictable systemic support, albeit at different speeds in different countries and regions. Given the extensive changes in the legislative, regulatory and supervisory regimes in jurisdictions around the globe, DBRS anticipates that this evolution will impact its assessment of systemic support. Under the current Criteria, in a regime in which DBRS judges systemic support to be sufficiently predictable in timeliness and scale, the final rating of a systemically important bank can be improved through notching above the bank’s intrinsic assessment (IA). In such regimes, this uplift has turned out to be generally one notch.

We continue to focus on the evolving willingness and ability of governments around the world to provide support. One factor is the political direction in many countries that wants to constrain the future provision of support to banks as a result of the recent crisis. This has resulted in the passage of legislation limiting systemic support, including in some cases the introduction of bail-in for senior unsecured obligations of banks. This Criteria clarifies the meaning of the IA in light of different approaches to bail-in across jurisdictions.

Legislation alone is not sufficient. Also critical are the changes that reduce the potential for financial market contagion, if a systemically important bank has to be resolved. One change is the significant increase in capital requirements for banks, particularly the increase in loss absorbing capital. At the same time, the capital rules under Basel III together with local regulatory requirements are driving banks to reduce their risk profiles. Elevated liquidity requirements are another important change towards making banks and the financial markets better able to withstand a financial crisis. More demanding requirements only work, if there is a strong, consistent supervisory framework to ensure that implementation is effective. Strong supervision with appropriate powers is also important in early action to remedy developing weaknesses in a bank or a banking sector. Better tools, such as stress tests, can provide effective early warning systems and enhance banks’ own management of risks. Improvements in the working of the financial markets are another factor, as for example, in the movement of over-the-counter transactions onto clearing houses and better coordination of the treatment of derivatives.

Ultimately, the conclusion of our analysis may be that in some jurisdictions the willingness and ability have changed to such an extent that a notch uplift for support is no longer warranted. Such a change would not be a simple reflection of new legislation or a specific regulatory development, but rather the accumulation of changes across the various components. As a result, there could be more countries like the United States, where DBRS does not view the predictability of systemic support as being sufficient to lead to a notch of uplift. Support is possible, but not sufficiently predictable in timeliness and scope. That determination would have consequences for the final ratings of systemically important banks that are currently benefiting from a notch of support that raises their final ratings above their IAs

Notwithstanding today’s release, DBRS continues to monitor the effectiveness of this criteria and other banking related methodology in light of the ongoing evolution of banking legislation, regulation and supervision globally.

DBRS will continue to provide additional clarity and implement new considerations in its methodology updates as appropriate on a timely basis. DBRS's rating definitions and the terms of use of such ratings are available at www.dbrs.com. DBRS’s methodologies and criteria are available by contacting us at info@dbrs.com.