The economy may be improving, but banks appear unlikely to regain the creditworthiness they enjoyed before the financial crisis any time soon.
Despite measures by regulators to bolster bank safety and steps by banks to strengthen their own balance sheets, a mix of economic uncertainty and financially stressed governments will continue to depress independent assessments of the credit risk banks present, according to a report published Tuesday by Moody's.
According to the ratings agency, ratings of banks' credit strength are unlikely to return to their former levels even after the economy recovers and governments worldwide stabilize financially.
"What we attempted to do in this report was to lay out some of the longer term trends that we're anticipating, Gregory Bauer, a Moody's managing director for global banking, told American Banker. "This is not an outlook for the coming year but really extends to our thinking about how we anticipate the fundamentals of bank credit profiles for a sustained period."
The financial strength of banks will remain vulnerable so long as the macroeconomic environment and governments "remain under stress," according to the report.
The report notes that before 2007, banking was a relatively low-risk sector of the economy as measured by the number of defaults. Fiscally strong governments worldwide fueled a business environment that supported loan growth and bank profitability. Credit ratings reflected both low rates of default and the likelihood that governments would rescue banks that stumbled financially.
Since 2007, however, Moody's has lowered ratings on banks to reflect both a rising rate of defaults and a string of macroeconomic shocks that have dragged down profitability, thinned capital buffers, choked liquidity and hindered the ability of governments to support the financial system. Moody's median rating on senior debt at U.S. banks has fallen four notches — from Aa3 to A3 — in the past five years.
"The biggest change were seeing now is a diminished probability of support for banking systems due in large part to the diminished capacity of sovereigns to support their banks in many cases and a political conviction to avoid using public funds to support banks," Bauer said.
According to Moody's, banks also have inherent qualities that pose credit risks regardless of support by governments and assists from regulators. Such qualities include significant leverage, susceptibility to runs, opaque financial reporting and a dearth of incentives to limit risk so long as bankers think regulators regard their institutions as too big to fail.
The authors note that the ratio of banks' total assets to common equity has long approached or topped 25-to-1. They also point to
Moody's says efforts by regulators to shore up safety and soundness of banks in the wake of the financial crisis has helped to counter credit risk somewhat. "On balance, we find generally in the U.S. as well as in other systems…tightening of prudential supervision to be largely positive and supportive of bank financial strength," Bauer added. "In the absence of many of these the ratings we're sure would have suffered more severely than they have."
