summary of moody's jda for banks - Bad Request

Global Credit Research
Financial Institutions
May 29, 2007
Going forward, there will be no
significant impact on secondary
market spreads …
… nor on primary market
activity
It has not become much easier
to forecast Moody's ratings
JDA application to other
industries would take at least
one year
Sector Report - Summary of Moody's JDA For Banks
FAQ
What is the implication for secondary market spreads?
Following increased volatility after the big bang on February 23 (and even
before that date), the situation has calmed when Moody's announced to revise its
approach in mid-March. Going forward, the market will not adjust to spreads
completely reflecting the new ratings for two reasons: First, there have always
been spread differences between similarly rated banks, as the agencies' view is
not 100% shared by the market. In the current case, the new ratings derive from
a new methodology, and not from changed fundamentals, and are also based on
an old story (too big to fail). Second, there are other rating agencies whose view
is different, and which are also recognized by market participants. In this
respect, we are interested to see the effects on Moody's Market Implied Ratings,
which were introduced to shed some light on the differences between rating
implied and actual spreads. Moreover, there are three other implications: (i) the
number of split ratings increased, as has uncertainty about fair pricing; (ii) some
small banks, as already happened, could terminate contracts with other rating
agencies in order to improve their rating profile and save costs and time at the
same time; (iii) new investor groups have been allowed to invest, as certain
rating hurdles (which impose investment limitations) have been cleared.
Is there an impact on primary market activity?
Moody's new ratings coincided with the market correction at the end of
February, abruptly stopping issuance activity, caused by both market
uncertainty and hope for better finance conditions (induced by better ratings).
Going forward, however, we do not expect any further impact.
Has it become easier to forecast Moody's ratings?
Not really. Although Moody's provides much insight into its scorecard weights
for qualitative and quantitative criteria, there are numerous decisions whose
individual result can only be forecast in a certain range. However, their effect on
the notching scale heavily depends on the actual outcome (which to a large part
depends on the rating committee's decision), and in combination could lead to a
completely different picture when compared to the alternative outcome.
Will JDA be applied for other industries?
Limited Basel II implications What about Basel II?
We think that the discussion
about Moody's credibility will
soon come to an end
While not having concrete plans, Moody's can imagine to apply JDA to other
sectors, such as insurance or industrials. However, it would first publish
proposals with request for comments by market participants.
In the standardized approach, banks have to consider the second best rating if
there are two or three ratings. In the advanced approaches, the bank has to
make its own assessment anyway; the better Moody's rating could serve as an
argument only when discussing the internal ratings with the auditor and
regulator. Hence, a strong impact is limited to the standardized approach when
there is only a Moody's rating.
Has Moody's lost its credibility?
Although there has been much criticism (both justified and unjustified, in our
view), we dare the forecast that the credibility issue will cease to exist in a few
months time, following Moody's adjustment of its methodology.
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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