Governments throughout the world could once be relied on to help bail out failing banks.
But such support is slowly falling by the wayside as regulators opt to let market forces decide the fate of troubled banks.
And this fact is causing some disagreement among rating agencies over the extent to which government support should figure in the ratings.
"We are going from a world where no bank failed to a world in which banks can fail, and this has caused us to reconsider the issue," said Chris Mahoney, managing director, banking and sovereign ratings at Moody's Investors Service.
Although rating agencies agree that government support, especially for second-tier banks, is becoming increasingly uncertain, they differ over the extent to which government support should be factored in to the rating of big international banks as well.
In a recent report, IBCA Ltd., the London-based credit rating agency, has argued that both Moody's and Standard & Poor's have consistently underrated big international banks because they do not adequately take into account government support.
IBCA singled out earlier ratings on U.S. and more recent ratings on Japanese banks as two examples.
"When rating agencies were quick to downgrade U.S. banks in the early 1990s, we preferred to take a longer-term view because we felt banks would recover, and they have," said Mark Gross, senior vice president for the rating agency's U.S. unit in New York.
Similarly, he added, major rating agencies have overshot the mark with Japanese banks, downgrading them more than market realities warrant.
IBCA's average rating for the major Japanese banks is now A plus. S&P's equivalent rating for the same banks is A-minus, while Moody's is single A.
Executives at Moody's and S&P contested IBCA's assertions.
"The U.S. banking industry was under pressure, and the ratings appropriately reflected that," said Clifford Greip, executive managing director in financial institutions at Standard & Poor's.
"Actual experience (during a real estate crisis) warranted the kind of changes that we made," he added, noting that no major independent bank survived in Texas as a result of an earlier real estate crisis.
"Do we give insufficient attention to government support?" asked Mr. Mahoney. "Not in my opinion."
Rating agency executives stressed that government support for most major banks around the world is still either explicit or implicit. That is to say, either the bank is government owned and therefore government guaranteed, or the bank is too big to be allowed to fail because the impact on the financial system would be too great.
But they also noted that there is a growing measure of uncertainty over the extent to which governments are prepared to intervene when a bank runs into problems.
Mr. Greip noted that governments have increasingly emphasized that they are less willing to bail banks out of trouble.
"Regulators, particularly in the Japanese market, have been very clear about allowing greater market discipline," Mr. Greip said, "so I think in fact that the system has become, over time, less protective."
