Credit rating agency Moody’s Investors Service is proposing to introduce a new metric to define its opinion on the probability of bank defaults, and the counterparty risk this represents.
Moody’s is currently in the process of updating its methodology for rating global banks, and today it proposed the introduction of a new bank counterparty risk (CR) rating and methodology. The new rating component would provide Moody’s opinion on how counterparty obligations are likely to be treated if a bank fails.
The proposed CR rating would be distinct from other bank ratings, Moody’s says, because it will only consider the risk of default, rather than both the likelihood of default and the expected financial loss suffered in event of default; and, because it will apply to counterparty obligations and contractual commitments rather than debt or deposit instruments.
“The ongoing evolution of banking resolution tools that increasingly include debt “bail-in,” underscores the need to differentiate counterparty risk relative to the debt ratings,” it says.
This new rating would provide an opinion on a bank’s counterparty risk related to its covered bonds, contractual obligations, derivatives, letters of credit, guarantees and liquidity facilities.
At the same time, the rating agency is proposing changes to its global approach to rating covered bonds, and its methodology for rating structured finance transactions, in light of proposed changes to its global bank methodology, including the introduction of a new bank CR rating. Moody’s says that it can’t define the exact impact on covered bonds or structured finance transactions until the methodology is finalized.
Moody’s is seeking market feedback on its proposed new methodology by Feb. 9.