Central Banks

Wednesday, December 2, 2015 - 20:57

S&P Downgrades Non-Op Holding Companies of Eight US GSIBS-Text


WASHINGTON (MNI) - The following are excerpts of the Standard & Poor's ratings change announcement late Wednesday for the non-operating holding companies of the eight U.S. global systemically important banks because of the new resolution regime being put in place, keeping the ratings outlooks stable instead of on credit watch:

OVERVIEW

- Based on our review of progress made toward putting in place a viable U.S. resolution plan, we now consider the likelihood that the U.S. government would provide extraordinary support to its banking system to be "uncertain" and are removing the uplift based on government support from our ratings.

- As a result, we are lowering by one notch our ratings on the nonoperating holding companies (NOHC) of all eight U.S. global systemically important banks: Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp., The Goldman Sachs Group, and Wells Fargo & Co. The rating outlooks on these NOHCs are stable.

- Due to the construct of the U.S. resolution regime, in which NOHC creditors could ultimately provide support to the operating entities, our ratings on all eight of these banks' core and highly strategic operating subsidiaries remain unchanged, as these ratings now all include one notch of uplift from the implementation of our additional loss-absorbing capacity (ALAC) criteria.

- We are keeping our ratings on the core and highly strategic operating subsidiaries of Bank of America Corp., Citigroup Inc., Morgan Stanley, and The Goldman Sachs Group on CreditWatch with positive implications as we await sufficient clarity from regulators on which instruments will count toward total loss-absorbing capacity, which may result in an additional notch of uplift under our ALAC criteria for these banks.

- Finally, we have concluded our review of our treatment of nondeferrable subordinated debt for U.S. banks. We will now treat these instruments as hybrid capital based on our view that due to a more strict interpretation of certain legal provisions in these notes, and because we expect creditors to be the frontline of defense for a nonviable bank, it is possible that these instruments could absorb losses without provoking a default on senior unsecured debt.

RATING ACTION

On Dec. 2, 2015, Standard & Poor's Ratings Services took the following rating actions on the eight U.S. global systemically important banks (GSIBs):

- We lowered our nonoperating holding company (NOHC) ratings, including our long-term issuer credit, senior unsecured, and nondeferrable subordinated debt (NDSD) ratings, on all eight U.S. GSIBs: Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp., The Goldman Sachs Group, and Wells Fargo & Co. We removed these ratings from CreditWatch, where we placed them on Nov. 2 with negative implications. The rating outlooks on all eight NOHCs are stable.

- We lowered our short-term rating on the NOHC of JPMorgan Chase & Co. to 'A-2' from 'A-1'. We affirmed the short-term issuer credit ratings on the NOHCs of the other seven GSIBs.

- We lowered our ratings on the NDSD of the operating subsidiaries of Bank of America Corp., Bank of New York Mellon Corp., JPMorgan Chase & Co., State Street Corp., and Wells Fargo & Co., and removed the ratings from CreditWatch, where they were placed on Nov. 2. We do not rate any NDSD at the operating companies of Citigroup Inc., Morgan Stanley, or The Goldman Sachs Group.

- We are keeping our issuer credit ratings (ICRs) and senior unsecured debt ratings on the core and highly strategic operating subsidiaries of Bank of America Corp., Citigroup Inc., Morgan Stanley, and The Goldman Sachs Group on CreditWatch with positive implications, reflecting a possible additional one-notch upgrade once we have sufficient clarity from regulators on which instruments will count toward total loss-absorbing capacity (TLAC). We placed the ratings on CreditWatch on Nov. 2.

- Our ratings on the core and highly strategic operating subsidiaries of Bank of New York Mellon Corp., JPMorgan Chase & Co., State Street Corp., and Wells Fargo & Co. remain unchanged. The outlooks on those entities remain stable. RATIONALE The rating actions reflect our revised assessment of the U.S. government's likelihood of providing extraordinary support to the banking system to "uncertain" from "supportive." We believe the U.S. resolution framework is now "effective," which implies that the probability that a U.S. GSIB would receive extraordinary government support if it came under stress is lower. Although we do not rule out the possibility that a U.S. GSIB could receive extraordinary government support if an orderly liquidation proved more disruptive than expected, the predictability of such support, in our view, has significantly declined such that we view it as uncertain.

Our change in view follows the Federal Reserve's recently released notice of proposed rulemaking (NPR), which outlined the TLAC requirements for U.S. GSIBs. The amount of TLAC that U.S. GSIBs will be required to hold was one of the key factors in whether we would deem the U.S. as having an effective and actionable resolution regime.

The Federal Reserve's TLAC rules, which we expect will be finalized in 2016, will require banks to maintain, at their NOHCs, minimum levels of capital and long-term debt that can be bailed in to absorb potential losses from subsidiaries and to recapitalize the operating and new bridge holding companies. This aims to limit the systemic impact that the failure of a single institution might have on financial markets while also avoiding taxpayer support of the GSIBs, a key cornerstone of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its establishment of an Orderly Liquidation Authority (OLA). This process--the single point of entry approach favored by the U.S. resolution framework--puts NOHC creditors at risk while reducing the likelihood that operating subsidiary creditors will take losses.

In addition to the minimum TLAC requirement, we also believe that other key hurdles in regard to the U.S. resolution regime have now been addressed. Specifically, there is improved (although not complete) transparency around the bail-in characteristics and proposed hierarchy of different securities among NOHCs and their operating subsidiaries. In addition, progress has been made in regard to settlement practices for cross-border liabilities, such as the International Swaps and Derivatives Association protocol to restrict stays (via cross defaults) while entities are in resolution.

With our revised assessment of the likelihood the U.S. government would provide extraordinary support for the banking system as uncertain, we now, in line with our criteria, incorporate the benefits of support from ALAC, a Standard & Poor's measure that has similarities to TLAC. These criteria determine the degree of uplift that the loss-absorbing instruments currently in place, or expected to be in place, at the NOHC level provide to our ICRs at the operating subsidiaries.

We are uncertain, though, which instruments will ultimately count as TLAC eligible. Specifically, it is unclear whether legacy senior unsecured long-term debt instruments, including those issued between the dates of the proposed and final rule, with certain standard features, such as acceleration rights for breaches of certain covenants, will be TLAC-eligible instruments. In our view, the language of the NPR suggests such debt would not qualify for TLAC, although it is unclear whether the Fed will stick with such a strict interpretation given the amount of additional debt banks would ultimately need to raise. Given the lack of clarity regarding regulatory treatment of these and some other instruments, which comprise a sizable portion of potential loss-absorbing capacity, we have opted to exclude them from our ALAC ratio at this point. As a result, we are currently limiting the uplift in our ratings based on ALAC to one notch, with the possibility of adding a second notch of uplift for banks that would qualify (those that have a stand-alone credit profile [SACP] of 'a-' or lower and that have sufficient quantities of ALAC, per our criteria), should the Fed include these securities in its final TLAC rule.

U.S. GSIB HOLDING COMPANY RATINGS

Upon our designation of the likelihood the U.S. banking system would receive extraordinary support from the government as uncertain, we have removed the one or two notches of uplift we previously included in our ratings on the eight U.S. GSIBs. This resulted in lowering the ICRs of all eight GSIB NOHCs by one notch. The ratings for these NOHCs are now two notches below their supported group credit profile (GCP), a term we use to reflect our assessment of the consolidated creditworthiness of each bank group as if it were a single entity. The supported GCP of these entities currently incorporates one notch of uplift based on ALAC.

--MNI Washington Bureau; tel: +1 202-371-2121; email: denny.gulino@mni-news.com

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