Scope Ratings has today published a commentary examining the latest regulatory developments covering implementation of bank resolution measures in Europe, and their impact on bank ratings. By highlighting its thinking in assessing ratings scenarios of a resolution and recovery environment at an early stage, Scope contributes to rating and analytical transparency and clarity to which it is committed.

Scope’s comment summarises the concepts presented in its latest bank rating methodology update (May 2015), based on recent regulatory proposals. Once the new rules are finalised, probably later this year, Scope expects resolvable banks to begin allocating or issuing liabilities to be included in the ‘minimum requirements for own funds and eligible liabilities’ (MREL) and/or ‘total loss-absorbing capacity’ (TLAC).

The two likely scenarios presented by Scope are that banks are likely to either (i) allocate specific liability pools to MREL/TLAC, or (ii) leave the entire pool of unsecured debt as potentially eligible for MREL/TLAC. Highlighted in the latter category is the situation of senior unsecured debt issued by banks in Germany.

Scope added it will not rate senior unsecured debt and other eligible liabilities higher than the Issuer Credit-Strength Rating (ICSR) even if the amount, stability and predictability of liabilities qualifying as MREL and/or TLAC is very material. This is because a bank’s liability mix – including the size, stability and predictability of liabilities qualifying as MREL and/or TLAC – is already accounted for in the analysis underpinning the ICSR, and reusing it to notch up non-MREL/TLAC-qualifying debt ratings may be a form of double counting.

For debt issued by banking groups with a holding company (HC) structure – in the UK, Benelux and Switzerland – the rating of HC senior unsecured debt with similar terms and conditions as the senior unsecured debt of the operating bank(s) should be the same. This assumes that in a stress scenario there are no grounds to believe the HC’s creditors would be treated differently from creditors of the operating bank(s). This is not the case in the US, where the regulatory status of bank HCs has been different for decades.

However, under planned resolution avenues, primarily under ‘single point of entry’ (SPE), HCs may be expected to issue debt – including senior – which would be included in the MREL and/or TLAC. Such debt would be less remote from a bail-in situation than other senior unsecured liabilities. If this was the case – either explicitly disclosed by the bank or its supervisory authority, or considered as a likely scenario – such debt would be rated below the ICSR according to the specific terms, conditions, and seniority.

Scope’s comment, as well as the updated bank rating methodology, can be accessed at www.scoperatings.com

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