Apr 01, 2013
New York, March 27th 2013 - Moody's new special comment titled, "Reassessing Systemic Support in US Bank Ratings -- An Update and FAQs" revisits the Dodd-Frank Act's (DFA) Title II Orderly Liquidation Authority (OLA). The OLA creates a legal structure for the FDIC to resolve troubled systemically important US financial institutions. The challenges that remain surrounding its successful implementation, however, have to date led Moody's to maintain systemic rating uplift in its credit assessments of eight US banking groups. The rating agency expects to update its support assumptions for these banking groups by the end of 2013.
The FDIC's proposed approach to implementing OLA is "single entry receivership." Under this approach, the FDIC would impose losses on bank holding company shareholders and creditors and use the holding company's resources to recapitalize its systemically important operating subsidiaries. "Although the FDIC has made considerable progress in identifying the hurdles to resolving these complex, interconnected institutions, challenges to implementation remain," says David Fanger, a Moody's Senior Vice President and co-author of the report.
In the report, Moody's discusses the four main challenges facing the US bank regulators in implementing single entry receivership: 1) the need for cross-border regulatory coordination; 2) the capital structure of these banks; 3) the complexity of these firms' legal, funding, and operational structures; and 4) the high degree of interconnectedness among these firms. "The FDIC's biggest challenge is the need for increased international regulatory cooperation," noted Fanger. "This is because these systemically important banks operate in many parts of the world under legal and regulatory frameworks that are outside the FDIC's ability to control."
Recognizing the direction and progress the FDIC was making with OLA and increasing the resolvability of these firms, in June 2012 Moody's assigned negative outlooks to the supported holding company debt ratings (that benefit from up to two notches of uplift) of the affected large banking groups while assigning stable outlooks to the supported ratings of their operating banks (that benefit from one to three notches of uplift). By year-end 2013 Moody's expects to update its support assumptions -- either maintaining or lowering them -- for those eight systemically important US banking groups.
The report also provides responses to frequent questions from market participants, including a detailed diagram of the resolution framework and a discussion of bail-in capacity for systemically important US bank holding companies.
Re-disseminated by The Asian Banker