Bank Ratings Incorporate Expectations For ... - Standard & Poor's

We associate ranges of our projected RAC ratio with different capital and earnings assessments (see chart 2). For
example, capital and earnings are adequate when the projected RAC ratio is 7%-10%. Consequently, the capital
and earnings assessment provides an indication of how we expect the RAC ratio to develop. If the historical RAC
ratio is much less than 7%, and we view capital and earnings as adequate, one can conclude that we expect the RAC
ratio to strengthen in the future.
Bank Ratings Incorporate Expectations For Improving Capital Assessments Globally
The more qualitative risk position assessment complements our view of a bank's risks by comparing the
bank-specific risks to the standard risk assumptions that we use to calculate RAC ratios. In other words, a strong or
very strong assessment indicates that our RAC ratio understates a bank's capital position. A moderate or weaker
assessment means our RAC ratio overstates a bank's capital position. Risk concentrations and diversification are an
important factor in the risk position, as is the complexity and changing nature of risks. This section of our analysis
also considers the risks that we don't factor into the RAC ratio, such as potential mark-to-market write-downs on
sovereign exposures, notably to Southern Europe, as well as interest-rate risk in the banking book and funding risk.
(See the RACF criteria, "Bank Capital Methodology And Assumptions," published Dec. 6, 2010.)
The Risk-Adjusted Capital Ratios Are The Starting Point For Our Capital And
Earnings Projections
The challenge of comparing regulatory capital ratios globally led Standard & Poor's to develop its risk-adjusted
capital framework (RACF). The main quantitative output of the RACF is the RAC ratio. TAC represents an
enlarged definition of the amount of capital a bank has available to absorb losses. It includes some hybrids subject
to eligibility criteria and limits (see "Bank Hybrid Capital Methodology And Assumptions," published Nov. 1,
2011). We derive our RAC RWA from globally consistent risk charges applied to on-balance-sheet and
off-balance-sheet exposures. Our risk charges capture credit, market, insurance, and operational risk losses under a
'A' stress scenario. (For detailed examples of Standard & Poor's stress scenarios, see Appendix IV of "General
Criteria: Understanding Standard & Poor's Rating Definitions," published June 3, 2009.)
Our capital and earnings assessments for 100 of the largest banks in the world, mostly based on the projected RAC
ratios, correlate highly with the estimated RAC ratios as of September 2011 (see chart 2).
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