Ratings criteria under pressure from EU bail-in regs

A raft of council treasury management strategies (TMS) for the new financial year have loosened their ratings criteria for investments, in anticipation of downgrades to UK banks’ credit ratings.

All three of the main ratings agencies have announced they are keeping a close eye on UK banks due to new bail-in regulations adopted by the UK government.

Many local authority treasurers, anticipating a change in ratings, have adjusted their risk parameters in 2015/16 TMS documents, according to David Green, client director at treasury adviser Arlingclose.

“No individual banks have actually been downgraded by the agencies, but I would estimate around half of our clients have lowered their thresholds for investment decisions,” said Green.

Manchester Combined Authority recently voted to lower its investment criteria to F2 (Fitch) or equivalent from F1. In a document seen by Room151, the authority said: “The ratings agencies reviews have placed pressure on the short term ratings of the combined authority’s existing counterparties.

“For the authority to maintain the current counterparty list the minimum short term rating criteria needs to be reduced.”

Green said that Arlingclose has advised clients they should only invest with parties specified by themselves if authorities chose to loosen their approach.

“We have advised councils that lower criteria should only be adopted in limited circumstances,” he said. “The TMS would allow it to happen but a decision would only be taken in conjunction with our advice.”

Some councils have chosen to maintain their investment criteria at higher levels, he said, often because a downgrade is perceived as more risky by councillors.

However, David Whelan, managing director of treasury solutions at rival adviser Capita Asset Services, said the lowering of investment criteria has been minimal among his clients.

Capita has advised councils that the removal of implied sovereign support to banks might be counterbalanced by strengthening of financial markets and banks resulting from the wider scope of regulatory changes, he said.

He told Room151: “It would have been easy to just focus on the potential negative aspects of the regulatory changes, but by ensuring we focused our clients on the wider picture they were able to make informed decisions over any changes to their investment strategy for 2015/16.

“In the main, the methodology changes are not resulting in downgrades to financial institution ratings, thus there has been little requirement on clients to change their investment criteria.”

Whelan said that although Standard & Poors had last year indicated that a review of the banking sector could lead to downgrades of UK banks, “further discussions with all the relevant parties has suggested that changes are not the foregone conclusion that the agency originally intimated”.

He added: “There is some uncertainty as to whether they will downgrade entities in May, to then potentially upgrade them soon after due to anticipated changes to their methodology with respect to capital buffers at financial institutions.”