S&P to review UK bank ratings in January

Written on:November 26, 2014
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Ratings agency Standard & Poors has announced the date by which it expects to review ratings for UK banks due to bail-in legislation.
The agency this week said that it would begin its review in January following the adoption of the European Union Bank Resolution and Recovery Directive into UK law by the end of this year.
The new rules would leave banks to fend for themselves without taxpayer support in the event of any future banking crisis – likely to lead to ratings downgrades. Wholesale downgrades would leave many local authority treasurers needing to either revise investment strategy altogether or make adjustments to risk parameters in their annual treasury management strategies.

A statement from S&P said: “We conclude that extraordinary government support would likely become less predictable in the near term under the new legislation, but that important issues have not yet been resolved.
“This would likely lead us to place the relevant ratings on CreditWatch with negative implications, with a view to resolving the CreditWatch placement within three months.”
However it said that unresolved issues over the predictability of government support for banks are likely to be unresolved until late 2015, in which case it could opt to leave the ratings and outlooks unchanged.
The agency emphasised that ratings for each bank would reflect any specific factors, such as changes to their stand-alone credit profiles (SACPs).
It added that it “may also apply this notch of adjustment to the credit rating where a bank benefits from substantial financial flexibility to absorb losses while a going concern, if that flexibility is not otherwise captured in the SACP”.
Support for banks’ non-operative holding companies (NOHCs) could reduce more quickly than for operating entities, the agency predicted.
It said: “This is because the introduction of statutory bail-in powers in January 2015 will likely leave the UK authorities much better positioned to execute swift and effective bail-ins of NOHC creditors.

S&P is also taking similar action relating to German and Austrian banks
The conclusion reflects advice earlier this year from other ratings agencies, and could increase pressure on local authorities to reconsider investments with these banks.
Earlier this month, the Financial Stability Board, which represents regulators from the G20 countries, proposed rules that globally important banks should hold a buffer of bonds or equity equivalent to up to 20% of their risk-weighted assets from January 2019.
Bonds would be converted into equity to bail in these banks if they get into difficulties.
The proposal is being put out to public consultation until February.

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