European banks risk debt downgrades

A number of European banks risk subordinated debt downgrades following withdrawal of government support as Moody’s plans ratings re-assessment on the back of regulatory changes.

Three Belgian, five French, six Dutch, two Luxembourgish, five Swedish, three Swiss, three Greek, six Portuguese, and as many as 17 Spanish banks risk a downgrade in their subordinated debt ratings by Moody’s. Germany’s banks have already been hit by a total of 248 subordinated debt downgrades.

A total of 177 banks across 46 countries worldwide are being re-assessed by the ratings agency, including seven large US groups.

Changing expectations of government support for the institutions have prompted the re-assessment exercise, with new bank resolution regimes being worked out internationally but particularly in Europe.

Moody’s will undertake the process over the next nine months. The first set of banks to be re-assessed are largely in Europe, after regulators signalled banks will be forced to impose losses on their creditors. The move follows earlier bank bailouts by taxpayers across the region, now considered politically unacceptable.

“In the wake of extensive bank bailouts, regulators have expressed an intent to reach more deeply into the capital structure to recover in future bailouts the cost to taxpayers,” the ratings agency said in a statement.

“The new resolution tools being contemplated are not uniform in their design, but the ultimate policy objective in all cases is to reduce and, if possible, eliminate the burden on taxpayers of resolving a troubled bank while instead imposing the cost on its creditors,” said Moody’s in a full report.

Moody’s also suggested proposed changes to bank resolution regimes alone may result in downgrades, due to fears about the regulatory impact on institutions.

“It is also important to note that the mere existence, or imminent introduction, of resolution tools may heighten the probability of losses for creditors because the threat of regulatory intervention can spur creditors to agree to an exchange of securities that results in economic loss,” it said.

Moody’s subsequently announced downgrades to subordinated debt of 23 German banks and an Irish subsidiary of a German bank on 17 February 2011.

“This follows the introduction of the German Bank Restructuring Act, which in Moody’s opinion increases the risk of losses being imposed on subordinated debt outside of liquidation,” the ratings agency said.

Under the new law, losses can be imposed on debt-holders of an institution at risk under a “bail-in” plan, or debt can be separated into different classes, of “goingconcern” and “gone concern” legal entities.

“Previously, debt was likely to suffer permanent losses only in the scenario of the liquidation of a bank.

“The new regulatory tools allow authorities to impose losses on debtholders without necessarily placing the entire bank into liquidation,” said Moody’s.

Expectations of regional government support in Germany for unsubordinated and even senior debt have lowered since the introduction of the Act, prompting the ratings’ changes.

“With these tools available, the rating agency believes that government support–including support from public-sector owners – for subordinated debt instruments has become far less certain than in the past, given its characteristic as regulatory capital and its reduced systemic importance as an asset class,” said Moody’s.

A number of household names have been affected, including Commerzbank, DekaBank, Deutsche, DZ and UniCredit.

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