08. May 2017 Scope research – Cross-sector
Scope updates bank rating methodologies, continuing to reflect MREL/TLAC unsecured debt ranking
Only non-material adjustments were made in Scope’s annual update of its bank rating methodology and bank capital securities rating methodology. Ranking of senior unsecured debt eligible for MREL and/or TLAC continues to be reflected in the rating range.
Scope Ratings has today released its updated methodologies on i) bank ratings and ii) bank capital securities ratings. The methodologies were first published in 2013 and 2014 respectively, with updates in both 2015 and 2016. Currently Scope assigns public ratings to 27 large banking groups in 11 European countries – including capital securities ratings for 24 banks.
The 2017 adjustments to the two methodologies are not material, and therefore existing ratings are not affected. The agency highlights that its rating approach continues to take into account, on a forward-looking basis, the most recent regulatory developments. Specifically, its bank ratings continue to reflect the ranking of senior unsecured debt eligible for MREL and/or TLAC – whether with a non-preferred status, statutory subordination, or contractual subordination in insolvency and/or resolution. Scope rates this debt class one notch below the bank’s Issuer Rating (and, when appropriate, the ratings of senior unsecured debt with a preferred status).
Scope’s ratings reflect probability of regulatory action
Looking at the track record of bank defaults across Europe and beyond, rare as they have been historically, Scope notes that these were the consequence of regulatory action, and not of commercial insolvencies or bankruptcies like in non-regulated credit sectors. Such actions could be in the form of early supervisory intervention (including preventing payments on capital securities), resolution-related debt bail-ins, or insolvency proceedings (for banks not subject to resolution).
From Scope’s standpoint, these scenarios make a strong case for market participants to have a firm grasp of the credit fundamentals of the banks they invest in or do business with. This is all the more important since regulators’ goals are to protect depositors and preserve financial stability, rather than to specifically shelter investors from losses. Scope’s ratings and analyses aim to address these challenges.
The following updated methodologies were authored by Sam Theodore and Pauline Lambert respectively and can be accessed on the links below:
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