Monday, April 16, 2012

Moody's weighs downgrading 114 banks in the EU

In an effort to remind the market that it may have access to information not available to other market participants, Moody's is talking about downgrading 114 banks in the EU.

Readers know that one of the reasons that banks should be required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details is this ends the possibility of the rating firms having access to information that other market participants do not have.

Ultra transparency ends the rating firms' information advantage and the market participants' dependence on the rating firms.

With ultra transparency, the rating firms have to compete based on their analytical ability.

According to a Wall Street Journal article,
European banks are bracing for a wave of ratings downgrades in coming weeks that could intensify pressure on the fragile industry and further undercut recent efforts to defuse the Continent's long-running financial crisis. 
Under pressure from banks, Moody's Investors Service said Friday that it is delaying until early May its highly anticipated decision on whether to downgrade the credit ratings of 114 banks in 16 European countries....

Moody's said in a statement it is "taking an appropriately deliberate approach during this review process and will conclude when it is confident that all relevant information has been received and processed."
In the absence of ultra transparency, Moody's reminds the markets that it may have relevant information that other market participants do not.
While Moody's hasn't said whether and to what degree it will cut various banks' ratings, officials at multiple top European banks said they expect their grades to be knocked down at least one notch. 
The looming downgrades have ignited a scramble among some lenders and investors who fear the development could fan the smoldering crisis. 
In recent weeks, as Moody's has neared its decisions, big banks have been lobbying the ratings agency not to slap them with multi-notch downgrades, according to people familiar with the matter....
The source of this relevant information is the banks and their efforts to lobby Moody's on its ratings.
The costs associated with Moody's downgrades could be high, according to bank regulatory filings and people familiar with the matter. 
Lower ratings could prompt risk-averse institutions to withdraw deposits with banks. In addition, banks likely will be forced to put up additional collateral on derivatives transactions and in certain investment vehicles, including those housing pools of securitized assets, if their ratings are cut. 
"This is a serious problem for all European banks, especially in peripheral countries," said the chairman of a top European bank that expects to be downgraded. 
For example, Deutsche Bank AG said in its recent annual report that a one-notch downgrade of its credit rating could expose the bank to a €45 billion "funding gap."... 
RBS warned in a recent securities filing that a one-notch downgrade could require the lender to post an additional £12.5 billion of collateral. A downgrade "could significantly increase its borrowing costs and limit its issuance capacity in the capital markets," the bank said in the filing. 
Lloyds recently disclosed that if all major ratings agencies cut the bank's rating by two notches it could have to post an extra £28 billion in collateral tied to financial contracts with customers and the bank's secured funding. The bank also warned that such downgrades "could result in an outflow of £11 billion of cash."....

Some bank officials argue the impact of the downgrades is likely to be limited.... 
they say, investors and bank customers have had plenty of time to anticipate the downgrades and therefore won't be surprised.

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