Bank Ratings Incorporate Expectations For ... - Standard & Poor's
Bank Ratings Incorporate Expectations For ... - Standard & Poor's 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). Standard & Poors | RatingsDirect on the Global Credit Portal | February 29, 2012 4 948538 | 300076937
Chart 2 The RAC Ratios Vary Highly By Region Bank Ratings Incorporate Expectations For Improving Capital Assessments Globally On average, these 100 banks increased their RAC ratios by about 40 basis points during the past five quarters. However, we note significant regional variations. Banks in Latin America, Germany, Asia (excluding China and Japan), Australia, the Nordic countries, and the U.S. exhibited stronger regional averages as of Sept. 30, 2011, whereas banks in the rest of Western Europe, Canada, China, and Japan had generally weaker RAC ratios (see chart 3). Our new hybrid criteria exclude from the TAC calculation most bank hybrid capital instruments that have coupon step-ups on an optional call date or features equivalent to step-ups. This significantly decreased French and Canadian banks' TAC, weakening their capital ratios relative to peers'. www.standardandpoors.com/ratingsdirect 5 948538 | 300076937
- Page 1 and 2: Financial Institutions Research Ban
- Page 3: Our Revised Criteria Clarify The Im
- Page 7 and 8: On Dec. 8, 2011, the EBA published
- Page 9 and 10: computes under the hybrid criteria.
- Page 11 and 12: Table 2 Estimated Capital Ratios Fo
- Page 13 and 14: atios (see table 3). In other words
- Page 15 and 16: Table 3 Historical RAC Ratios Pro F
- Page 17 and 18: Table 3 Historical RAC Ratios Pro F
- Page 19 and 20: Table 3 Historical RAC Ratios Pro F
Chart 2<br />
The RAC Ratios Vary Highly By Region<br />
<strong>Bank</strong> <strong>Ratings</strong> <strong>Incorporate</strong> <strong>Expectations</strong> <strong>For</strong> Improving Capital Assessments Globally<br />
On average, these 100 banks increased their RAC ratios by about 40 basis points during the past five quarters.<br />
However, we note significant regional variations. <strong>Bank</strong>s in Latin America, Germany, Asia (excluding China and<br />
Japan), Australia, the Nordic countries, and the U.S. exhibited stronger regional averages as of Sept. 30, 2011,<br />
whereas banks in the rest of Western Europe, Canada, China, and Japan had generally weaker RAC ratios (see chart<br />
3). Our new hybrid criteria exclude from the TAC calculation most bank hybrid capital instruments that have<br />
coupon step-ups on an optional call date or features equivalent to step-ups. This significantly decreased French and<br />
Canadian banks' TAC, weakening their capital ratios relative to peers'.<br />
www.standardandpoors.com/ratingsdirect 5<br />
948538 | 300076937
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