TOKYO, Feb. 4 /PRNewswire/ -- Standard & Poor's is introducing bank
survivability assessments to the Japanese market as a means to refine its
criteria related to bank account eligibility for structured financings. The
impact of this refined approach is to allow certain banks with a short-term
counterparty rating of 'A-3' -- but that are deemed to be large and
systemically important and that achieve a survivability assessment of 'A-' or
better-to qualify to hold operating accounts for, and serve in, up to
'AAA'-rated structured financings. Standard & Poor's will hold a
Japanese-language teleconference on Monday, Feb. 4, at 5 p.m. in Tokyo to
discuss the revised criteria (see below for details).
By way of background, Standard & Poor's eligible account criteria are
intended to insure that a transaction's payments, cash proceeds, and
distributions are isolated from the potential insolvency of any bank entity
that provides account services to the transaction. Recognizing that
governments typically support, or grant regulatory forbearance to, large and
systematically critical banks in times of financial system stress or incipient
insolvency, Standard & Poor's assessment of a bank's ability to survive is
typically stronger than that suggested by the bank's counterparty rating,
which addresses the likelihood of the bank defaulting on financial
commitments. (For a more in-depth discussion of the revised account
eligibility criteria for structured financings, see Standard & Poor's press
release "Account Eligibility Criteria for Japanese Structured Finance
Transactions Revised", published today).
Standard & Poor's has noted that bank regulatory and supervisory
authorities in many countries often assist key banks suffering financial
stress. This assistance can take the form of an active restructuring of the
troubled institution or, alternatively, the adoption of a more passive policy
of regulatory forbearance. Moreover, evidence collected globally from recent
episodes of government intervention in troubled key banks suggests that
structured transactions need not be compromised by severe bank financial
problems, assuming that the regulatory authorities honor the underlying
structure and, in addition, that the bank is allowed to maintain key
processing functions and possesses some operational liquidity. In Japan,
Standard & Poor's has concluded that a differential of up to three notches is
possible relating to the survivability assessment of system banks with
counterparty ratings in the 'BBB' category.
Origins of the "Bank Survivability" Concept
Standard & Poor's first introduced bank survivability assessments in Latin
America, in the context of recognizing certain bank operating risks tied to
future flow transactions, and differentiating these operating risks from
default risk, thus enabling certain future flow transactions to achieve
ratings higher than that of the underlying issuer. While clearly distinct
from a credit a rating, the survivability assessment is meant to acknowledge
that large, systemically critical banks are often supported or granted
regulatory forbearance by their governments in times of financial system
stress or incipient insolvency. This practice reflects the concern that many
governments often exhibit over the consequences that a major bank failure, or
rumors of a potential failure, could have on the functioning of both the
confidence-sensitive banking system itself and on an economy heavily reliant
on bank-supplied financial intermediation.
In Japan, the introduction of bank survivability assessments has been
prompted by the increasingly dire financial condition of essentially all
Japanese system banks-with estimates of problem loans (defined to include
loans requiring attention) now far exceeding the banks' aggregate capital
base. Bank survivability assessments are thus meant to anticipate possible
concerns of investors over the integrity of rated or to-be-rated structured
transactions related to banks that provide account services to those
transactions, while recognizing the strong underlying incentives of regulatory
authorities to allow certain systematically important financial institutions
to carry on critical and basic functions, even in a situation where the bank
may have defaulted on certain financial commitments.
A survivability assessment is an opinion regarding the likelihood that a
bank will remain in business performing basic banking functions (such as basic
deposit and disbursement services), regardless of whether it is solvent, or
whether it is meeting all of its financial commitments on a timely basis.
Survivability Assessment Versus Counterparty Rating
A rating-relevant implication of this practice is that systemically
critical banks can sometimes be in selective default on certain financial
obligations, but may nonetheless be allowed to remain in operation to
undertake some or all of their usual activities. In particular, a troubled
bank's processing functions, especially those that are essential to the
functioning of the economy and require little or no liquidity, can often be
maintained even under circumstances in which other bank-based financing
activity has either been suspended or frozen.
Standard & Poor's believes a supervising authority's willingness to allow
the partial functioning of impaired banks to be particularly likely in a
systemic stress situation in which a continuation or resumption of critical
payments systems functions is regarded by the relevant authorities as
essential to the operation of the economy. In these circumstances,
governments often have a strong incentive to keep all, or at least some, of
the nation's leading banking institutions at least partially operating for
fear of a systemic collapse that could cripple the economy for an extended
period of time. Even in cases in which the financial stress is institution
specific, however, the potential failure of a key bank is often regarded by
governments as potentially too destabilizing to the financial system -- or
politically unpopular -- to be allowed. Standard & Poor's bank survivability
assessments therefore give recognition to the incentives that governments and
monetary authorities have in maintaining the operations of key financial
institutions.
It should be noted that "survivability" in the sense that an issuing bank
avoids liquidation is a necessary, but not a sufficient condition, for a bank
to achieve a survivability assessment higher than that suggested by its
counterparty credit rating. The bank must also:
-- Be open for business, conducting basic banking transactions;
-- Maintain some sort of a viable branch network, in that a branch network
is typically necessary to service or generate, depending on the nature
of the structured transaction, the pool of assets underlying the
structured transaction; and
-- Maintain sufficient liquidity and basic deposit services, so that the
bank can perform the collection, payment, and remittance functions
required by the transaction.
It is also important to note that a survivability assessment is not to be
interpreted as an indication of the risk of loss on general deposits. A
failed bank may well be allowed to default on certain financial obligations,
including certificates of deposit, and may even be required to impose certain
limited withdrawal conditions on retailer deposits, while also being
encouraged to perform essential administrative and servicing functions that
are deemed critical to the integrity of the banking system and the economy.
Key Factors That Determine Survivability Elevation
In Japan, Standard & Poor's will assess whether an institution is eligible
for survivability rating elevation, as well as the degree of elevation, on the
following four criteria. These four points are intended to be an indicative
-- but not exhaustive -- list of the factors that Standard & Poor's considers
in assigning bank survivability assessments.
1. The Amount and Type of Liquidity the Bank Possesses Even in the event
of regulatory forbearance during a financial stress event, sufficient
liquidity will be necessary for the bank to continue to operate. In
order for an issuing bank's survivability rating to exceed its
counterparty credit rating by one full rating category, Standard &
Poor's must be confident that the bank's liquidity will remain
sufficient-notably through the continuing operation of an adequately
large branch network-to maintain transaction-critical operations.
2. Market Share and Ownership Structure of the Bank The larger the issuer,
relative to both its competitors and the market as a whole, the greater
the elevation credit that can be given. Ownership by the government
can also be an important factor.
3. Financial Strength of the Bank Relative to Other Large Banks in the
Same Market If an issuing bank's financial strength is strong relative
to its local peers, the institution may well benefit from a
flight-to-quality in the event of a systemic crisis and, therefore, be
more likely to survive. Banks that fall into this category would be
eligible to receive greater rating elevation than financially weaker
banks.
4. Historical Government Policy Regarding Bank Workouts Standard & Poor's
will analyze past policy statements and practices of the supervisory
authorities to determine the likelihood of official support should the
bank experience serious financial stress. Based on the evidence to
date, with numerous failures of smaller financial institutions and a
few failures of larger banks, the track record indicates the government
has worked toward preserving troubled banks' key operations and even
honoring the banks' capital market obligations. While there have been
instances of default on debt instruments, such disruption has not
extended to other bank operations. In the future, however, as evidenced
by the proposed elimination of the blanket deposit insurance system,
Standard & Poor's expects the government will be more circumspect about
bailing out failed banks. In particular, in the case of the failure of
systematically insignificant financial institutions-such as among the
smaller credit unions and cooperatives-broad-based losses, extending to
depositors, are quite likely.
Standard & Poor's will hold a telephone conference call on Monday, Feb. 4,
at 5 p.m. in Tokyo, to discuss bank survivability assessments and the revised
account eligibility criteria. The conference call will be conducted in
Japanese, and will be led by Takamasa Yamaoka of Standard & Poor's Financial
Institutions Ratings Group in Tokyo, and by Kenji Kondo of Standard & Poor's
Structured Finance Ratings Group in Tokyo. The telephone number and pass code
are listed below:
-- Number: +(81) 3-5539-7161.
-- Pass code: 2219450.
The conference call will begin promptly at the time indicated. Please call
at least 15 minutes beforehand to complete the precall registration process,
and provide the operator with the above pass code, the name of the conference
call you wish to join (Standard & Poor's), and the name of the call leader
(Takamasa Yamaoka). Participants will be asked to give their name, company
affiliation, and telephone and fax numbers. The conference call will last
approximately one hour. After a brief presentation by the analyst,
participants will be able to ask questions directly about Standard & Poor's
bank survivability assessments and the revised account eligibility criteria.
A replay of the call will be available for two weeks. The telephone
number and pass code for the replay are listed below are listed below:
-- Replay number: +(81) 3-5539-7171
-- Pass code: 523642
SOURCE Standard & Poor's
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Related links:
http://www.standardandpoors.com/ratings
CONTACT:
Takamasa Yamaoka, Tokyo, +81-3-3593-8719,
Michael Petit, Tokyo, +81-3-3593-8701, or Roger B Taillon, New
York, +1-212-438-7400, all of Standard & Poor's
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