Moody’s Investors Service has updated its rating methodology for global banks to accommodate new kinds of securities that banks are increasingly issuing in response to reforms to global capital rules.

The rating agency’s updated methodology includes a new framework for rating so-called ‘high trigger’ bank contingent capital securities (CoCos), and revisions to its existing framework for rating non-viability CoCos (NVCCs). Banks are increasingly issuing these sorts of securities, which often convert to common equity if the bank runs in to financial trouble, as the new global capital regime known as Basel III comes into effect.

Moody’s says that its framework for rating ‘high trigger’ CoCos uses “a model-based approach as a starting point to capture the multiple risks of these securities including the probability of a bank-wide failure, trigger breach, and/or coupon suspension, if applicable, and loss severity if one or all of these events happen.”

It has also revised its notching framework for rating NVCC securities, which Moody’s says could result in one notch rating upgrades for 14 securities of this sort that it has previously rated. Any specific rating actions due to changes in the methodology will be announced separately in the coming days, it says.

“With the publication of today’s bank methodology update, Moody’s is able to rate the entire universe of bank CoCos where equity conversion or principal write-down is triggered by regulatory discretion and/or the breach of regulatory capital triggers, in advance of or close to bank failure,” said Barbara Havlicek, senior vice president at Moody’s and co-author of the methodology update.

“Bank CoCos generally have a higher risk profile than other forms of hybrid capital, depending on their features. We are pleased to be able to use this updated framework to illustrate those risks to investors, especially in light of ever increasing market acceptance of – and investor interest in – contingent capital securities,” she added.

The revised methodology follows a comment process that Moody’s initiated on May 1. It also published a frequently asked questions (FAQ) document that includes a discussion of key changes as well as responses to recurring market feedback received during the comment period.