Regulation will not hit banks' financial strength, says Moody's
Share
Banks across the world should end up financially stronger as a result of a global reforms to regulation but long-term debt ratings could be hit, according to Moody’s.
The ratings agency says that ahead of the upcoming G20 summit in Toronto international consensus on a package of banking reforms is unlikely.
But it does expect most countries to introduce higher capital requirements, to limit the range of activities banks get involved in, and boost resolution powers to deal with any bank that needs to be wound up.
Senior vice president Alain Laurin says: “All the reform measures currently contemplated are intended to translate into safer and stronger financial systems in which banks’ risk profiles will be reduced and excessive risk-taking policies will be penalised.”
Yet the ratings agency still has concerns that if regulators choose to support depositors while imposing loss-sharing on other investors such as shareholders or debt holders, long-term debt ratings would come under further pressure.
Laurin says: “Overall, higher capital ratios and greater liquidity buffers will make banks more resilient. Nonetheless, they will not be assigned a higher financial strength rating simply because they will be subject to a tighter regulatory environment and presumably closer supervision.
“Safer banks may also imply less profitable banks. On balance, there is no reason to penalise a less profitable bank if its capital base, liquidity position and risk management are all strong. At the same time, we will need to assess if increased cost of capital and liquidity is pushing a bank to increase revenues in areas that perhaps are less effectively regulated and/or to exploit regulatory loopholes.
“We will continue to assess the impact of changing levels of systemic support on banks’ ratings. This is both in terms of overall support reflected in long-term debt and deposit ratings and in terms of changes to regulatory resolution powers, which could have a greater impact on senior, subordinated, and hybrid debt instrument ratings.”
If you enjoyed this article, sign up here to receive daily email updates from Money Marketing and Follow @_moneymarketing
