summary of moody's jda for banks - Bad Request

Global Credit Research
Financial Institutions
May 29, 2007
Sector Report - Summary of Moody's JDA For Banks
WHAT HAS HAPPENED SINCE FEBRUARY 23?
Start on February 23 On February 23, Moody's published two documents, (i) revising its BFSR
methodology, and (ii) introducing its Joint-Default Analysis for deposittaking
banks. While at a first glance, these methodology papers looked like a
more detailed description of what has been done ever since, the resulting
rating changes published the same day were pretty hefty. In a nutshell, all
banks which are too big to fail were rated Aaa or Aa1 at that time. Too big to fail
does not relate to the absolute size of the bank, but to its relative size when
compared to the home economy. This applied also to the three Icelandic banks
(Glitnir, Kaupthing, Landsbanki), which had been rumored to have liquidity
problems only some months ago. Moody's planned to roll out JDA for all banks
globally within eight weeks time, and to conclude this process in mid-April. The
market strongly opposed the new methodology.
Revision announcement on
March 9
Revisions postponement on
March 16
Refinements and new time
schedule published on March
30
New implementation started
on April 3 …
On March 9, Moody's stated that it is contemplating changes to JDA for
banks. The revision would particularly include banks whose default rating
significantly deviates from the Bank Financial Strength Rating (BFSR) as well as
the notching mechanism for subordinated paper. JDA ratings granted so far
might be changed as a result. Moreover, a new schedule for the roll-out would
be released on March 16.
On March 16, Moody's postponed the revision, and set the new release date
for March 30. Following the heavy negative market reaction, we think that
Moody's wanted to avoid any inaccuracy when presenting its revision and hence
postponed the release by two weeks. In a brief announcement, Moody's stated
only the following: (i) The impact of support on long-term ratings will be limited;
(ii) The notching for subordinated paper will be reviewed; (iii) JDA revised
ratings published so far will be reassessed; (iv) There will be a new schedule for
the country by country roll-out. The new time frame looked like this: (i) and (ii)
on or before March 30; (iii) targeted for April 10; (iv) on or before March 30,
with completion of the roll-out on May 18.
On March 30, Moody's published the "refinements" including a new roll-out
schedule. The adjustments included a lower implicit systemic support
assumption, stronger notching for weak banks, and generally more scope for
rating committee judgment. As a result of these amendments, Moody's expected
the average JDA implied rating upgrade not to exceed one notch compared to
the previous methodology, more closely reflecting Bank Financial Strength
Ratings, which is far below the Aaa inflation seen under the initial JDA
implementation.
On April 3, Moody's placed under review for downgrade 46 of the 210 banks
for which original JDA had been applied. Moody's also reviewed for upgrade
capital securities of twelve banks. On April 10, Moody's announced the
respective rating changes. Moody's downgraded 44 banks (29 by one notch, 12
by two notches, and 3 by three notches compared to the initial JDA application)
and confirmed two of them. Moreover, following the respective review
announced one week before, Moody's upgraded the junior securities of 13
banks.
… and was finalized on May 11 On May 11, Moody's concluded the JDA for bank implementation. All
respective Credit Opinions (including the details for each rating action) are set to
be published by the end of May, according to the agency.
Bayerische Hypo- und Vereinsbank AG, CA IB International Markets AG, Bayerische Hypo- und Vereinsbank AG Milan Branch See last pages for disclaimer.
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