Moody’s: Bailouts Won’t Boost European Bank Ratings

Moody’s welcomes the “unequivocal commitments to support their banks” by Heads of State of the Eurozone and the UK, but does not expect the moves to result in widespread ratings upgrades of European banks.

In a Special Comment,  Moody’s said it believes the measures will collectively help to restore financial flows within the banking system. “With these announcements, Moody’s considers that a substantial de-risking of the banking system is being achieved by providing significant capital and transferring banks’ credit risk to their supporting governments for the period necessary to restore confidence and normal financial market operations.”

“With implementation of this very clear systemic support, Moody’s expects that bank debt and deposit ratings of large European banks will stabilize; capital and liquidity support, which was previously at issue, is now being secured. At the same time, Moody’s does not expect widespread ratings upgrades.”

To varying degrees, systemic support already had been incorporated into our ratings, and the provision of support is likely to be temporary, with the result that the implications for long-term ratings are more limited.

“The exception will be for obligations of banks for which there is clear substitution of risk by the government for that of the bank, as in the case of explicit guarantees. Here, Moody’s will de-link the risk assessment from the bank and apply the appropriate government rating to the specific obligations. Selective rating actions (positive or negative) could still occur and would be driven primarily by long-term strategic and franchise considerations.”