Recent negative bank ratings actions foretell a secular trend that capital markets-oriented banks are slipping toward the lower tier of investment-grade categories. We believe these ratings downgrades are more than a temporary phenomenon that is easily reversible. While the near-term effect on corporate treasury portfolios will likely be manageable, long-term ramifications require more investor attention.
Cash investors should be aware of the potential supply shortages in the debt markets and the need for robust credit and counterparty research capabilities. Investors also should explore eligible investments in non-financial credits and consider direct investments through separately managed account solutions.
It happens so often that we’ve almost gotten used to it – banks have been beaten up by credit rating agencies time and again since the financial crisis began in 2008. While banks always rode their ratings through the ups and downs of market cycles, what we have observed in recent years may be a megatrend in the making, a trend that may have a long-lasting effect on the financial markets.
If bank ratings are headed for BBBs, and there certainly are indications of that happening, how might that trend impact corporate treasury professionals? How do we rethink our corporate cash investment strategies? What about uninsured bank deposits or counterparty risk management? With these questions in mind, we invite our readers to think through some of the key issues with us.
Large Banks’ Ratings Drift toward BBBs
On February 15, 2012, Moody’s Investors Service took two separate actions that placed 120 financial institutions and firms worldwide on review for downgrade. In its first action, Moody’s placed the ratings of 114 banks in 16 European countries on review for downgrade. In its second action, Moody’s announced a negative review of 17 banks and securities firms that are global capital markets intermediaries (GCMIs), with several of those European banks named in the first action also appearing on the second action list.
The Moody’s action on the 17 GCMIs represents a fundamental shift in the agency’s view of banks with capital market operations. In a related credit commentary, Moody’s now views the average standalone credit ratings of GCMIs, currently at A2, as moving to “the Baa range.” Note that Baa (Moody’s nomenclature for BBB) is the lowest investment-grade credit category. Securities with this rating often are considered ineligible for corporate cash portfolios.
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