Risk.net

Moody’s downgrades banks after methodology U-turn

The agency announced changes to its calculating methods on March 30, following market criticism that the system over-emphasised the external support that troubled banks could receive from a government. The initial methodology had led to the upgrade of 101 banks in February and March.

The new system applies lower support assumptions and uses fewer support levels to reflect the uncertainty of non-explicit government support. Intrinsic financial strength will be given greater weight.

The affected banks were predominantly European. Twenty-nine banks were downgraded by one notch, 12 by two notches, and three Icelandic banks were lowered by three notches. Two other banks’ ratings were unchanged.

“The average rating upgrade under the refined methodology will likely be less than one notch from ratings prior to the incorporation of JDA, and the distribution of ratings across the scale will more closely reflect the distribution of a bank's financial strength,” said Christopher Mahoney, chairman of Moody’s credit policy committee.

The regional rollout of the refined JDA method will resume on April 13 and conclude by May 11.

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