Moody's Investors Service plans to roll out a new way of analysing banks from September, to make the way it accounts for potential state support in a crisis more transparent, the rating agency's co-head of European banking said on April 06.
Moody's wants to ensure its ratings formally capture how willing and able a state is to help a troubled bank, as well as the lender's stand-alone financial strength.
Last June, the ratings agency upgraded dozens of big European telecoms, utilities and defence firms after reviewing their links to government.
"The reason why we do this is because the market has always told use we are too opaque in the way we do things ... the real objective of doing this is to create transparency," said Antonio Carballo, team managing director, banking EMEA at Moody's.
Some industry analysts have said the tweaks to Moody's local currency deposit ratings, in a process it calls joint default analysis, may prompt a slew of rating upgrades for major European banks, lifting some to the coveted triple-A level that tops the ratings scale.
However, Carballo told Reuters in an interview that although such a result was "not inconceivable", the process could lead to both upgrades and downgrades and would vary from country to country.
"From September onwards, or so, on a country-by-country basis we will be rolling out the updated methodology," Carballo said. "It's very difficult for us to say where rating changes may happen and if they happen, because we haven't gone through the process of rolling it out."
Carballo said Moody's would need to weigh a country's economy, banking system, banking regulation and supervision, and its "commitment to market discipline".
"If you look at banks, they are very risky businesses from a credit perspective. These are levered businesses which are intrinsically illiquid, with accounting which is difficult to figure out ... and therefore they are quite risky businesses, but, however, it's very rare to see them defaulting," he added.
Analysts say Moody's may be reluctant to lift its ratings, as it already tends to have higher ratings on banks than Standard & Poor's, its main rival, but Carballo said that was not a factor.
"It all has to do with whether we've under-estimated or over-estimated the value of implicit support... I think most market participants feel that we may have underestimated it," he said.
Credit spreads on banks tend to be tighter than those on similarly rated, non-financial borrowers.
"So the market historically has tended to feel that the probability of default for banks is somewhat lower than what the rating indicates," Carballo said.