Moody’s, the US rating agency, is to issue banks with a financial stability scorecard to give investors a clearer view of the risk of defaults in the financial system in the event of a slowdown in the world economy.
The scorecard, which will rank the strongest banks A and the weakest E, will look at each bank’s market share, geographical spread, earnings stability and diversification, as well as vulnerability to “event risk”, or the chances that one or more large debts turning bad suddenly could affect the viability of a bank.
Antonio Carballo, co-head of European banking at Moody’s, said: “We will provide nearly 1,000 banks, all those on our books, with new methodology over the next few months. This will measure the strength of each institution on a stand-alone basis.
“It will provide the market with more clarity and transparency and will enable it to price a credit more efficiently and accurately, and therefore offer more stability at a critical time when the credit cycle could be about to turn.”
Moody’s is also updating its Bank Financial Strength Ratings (BFSRs) to introduce a single, global methodology rather than separating those in mature and developing markets.
The rating agency will also incorporate what it calls a “joint default analysis” in its senior debt ratings for banks to assess the probability of government support in the event of a potential default.
Typically, a category A bank would have a strong brand name, a dominant market share and strong earnings, while a category E bank would have an insignificant market share with no recognised brand name.