Moody’s Investors Service announced today that it will reduce assumptions concerning the probability of systemic support for banks under its “joint default analysis” bank rating methodology.

Moody’s said that by reducing such support assumptions, its bank ratings will more closely reflect banks’ intrinsic financial strength.

Specifically, Moody’s said that it will: limit the impact of systemic support assumptions in the determination of bank debt and deposit ratings, and review the notching component of the JDA methodology for hybrid securities and other capital instruments issued by banks. These specific refinements to the bank rating methodology will be finalized and published on or before March 30.

Also, it will reassess, under the refined methodology, all bank ratings that have already been revised according to the JDA approach (i.e., those for banks in North America, the Nordic countries, Benelux, the Baltics, and Central Europe). The target date for releasing the rating adjustments that are
required for this universe of banks is April 10.

Additionally, it will issue a revised country-by-country schedule for those countries to which JDA-informed ratings have not yet been released. The new schedule will also be published by March 30.

Under this plan, Moody’s expects to complete its implementation of the JDA approach for all rated banks worldwide by May 18.

Moody’s said that it is taking these steps to meet the needs of investors and other market participants for ratings that accurately reflect default risk while providing a means of differentiating among highly rated institutions.

Chris Mahoney, chairman of Moody’s Credit Policy Committee, said “Our ratings have multiple attributes that make them relevant to market participants, including: accuracy, stability, transparency,
differentiation, and comparability. We continually consider the appropriate balance among these attributes in order to best meet the needs of the market. In our initial application of the JDA methodology to banks, some rating outcomes were heavily dependent on high external support assumptions. Market participants have indicated a preference for ratings that are less dependent on such assumptions, and reflect more emphasis on intrinsic credit fundamentals.”

Mahoney added that “We have decided to refine the JDA methodology to make it more relevant to market participants desiring greater ratings differentiation.”