The global banking sector is at a crossroads, following the unprecedented turmoil of the past four years. As it seeks to reinvent itself, the sector faces several critical inflection points that will affect the future creditworthiness of banks. It is too early to tell how each one will play out but we believe that our new banking criteria provides a coherent, globally consistent framework to assess how these developments are likely to affect the creditworthiness of banks. 

 

The first major inflection point currently facing the banking sector is a potential shift in the power balance of global banking between banks in the developed markets of Western Europe and the U.S. on one side, and the larger emerging countries in Asia and Latin America on the other. The second inflection point is the continuing regulatory uncertainty facing banks. While many attempts at regulation on a global basis have been tried, devising a universal system promises to be a thorny and potentially elusive quest.

 

The third inflection point is the potential consequence of a change in the nature of government support for banks. The intervention of governments and central banks around the world has succeeded in creating an interim period of stabilisation for many of the Western European and the U.S. banking systems. But, as the events of the last few months have shown, it is a fragile peace.

 

We believe that governments are looking for ways to reduce their contingent risk to the banking sector, but not at the expense of undermining the financial system. Consequently, we expect many governments will continue supporting banks until they are strong enough to stand without support. For some this could take years, if ever.

 

Our new bank criteria aim to provide greater transparency and consistency to reflect this evolving market. They place a greater emphasis on the country in which a bank operates, through an enhanced version of our existing banking industry country risk assessment (BICRA) methodology. By doing this, we will give more weight to the risks associated with growing economic imbalances, the resilience of the economy, and the importance of system-wide funding and the role of governments and central banks in this funding.

 

This starting point is then adjusted up or down the rating scale to reflect our assessment of a bank’s specific strengths and weaknesses in business position, capital and earnings, risk position, and funding and liquidity. After this, we assess the potential for government support and/or group support. Following final analytical adjustments and a vote by a rating committee, this then leads to the issuer credit rating.

 

Our new criteria will allow us to clearly separate the stand-alone credit profile and the impact of government support in our ratings. This means that a change in the likelihood of future government support for banks will be clearly identified and articulated.   

 

In conclusion, regardless of governments' recent and emerging policy responses, the historic pattern of banking sector boom and bust and government support will likely repeat itself in some fashion. New laws put in place following previous crises, such as deposit insurance, have not prevented subsequent downturns. Banking crises will likely happen again.

 

Our revised criteria will enable us to provide opinions that reflect the impact of these major systemic changes on the banking sector.