No material adjustments in the annual updates. Banks expanded capital structure – including non-preferred and preferred senior debt, as well as capital securities – continues to be reflected in the rating range.

Scope Ratings has today released its updated methodologies on (i) bank ratings and (ii) bank capital securities ratings. The methodologies were first published in 2013 and 2014 respectively, with updates in 2015, 2016 and 2017. Currently Scope assigns public ratings to 30 banking groups in 11 European countries – including capital securities ratings for 21 banks – in addition to non-public ratings on other financial institutions.

The rating agency noted that the 2018 adjustments to its two methodologies are not material, and therefore existing ratings are not affected. Scope highlighted that its rating approach continues to take into account, on a forward-looking basis, the most recent regulatory developments. Among other things, its bank ratings continue to reflect the ranking of senior unsecured debt eligible for MREL and/or TLAC (non-preferred senior), which are rated one notch below the Issuer Rating (and, when appropriate, the ratings of senior unsecured debt with a preferred status).

In its new bank rating methodology update, Scope introduces specific references to (i) ESG risk (mainly governance), and (ii) cyber risk, which have both taken heightened importance in recent years. Regarding the former, Scope noted that investors in bank debt are increasingly sensitive to its implications, adding that it is governance which in its view is particularly relevant for bank risk in an ESG context. With respect to the latter, the agency pointed out that, even if there are very few relevant metrics for a credit analyst to measure it, a bank’s cyber risk is becoming of paramount relevance and cannot be discounted by credit investors.

Scope’s ratings reflect probability of regulatory action

Looking at the track record of bank defaults across Europe and beyond, rare as they have been historically, Scope notes that these were the consequence of regulatory action, and not of commercial insolvencies or bankruptcies like in non-regulated credit sectors. Such actions could be in the form of early supervisory intervention (including preventing payments on capital securities), resolution-related debt bail-ins, or insolvency proceedings (for banks not subject to resolution).

From Scope’s standpoint, these scenarios make a strong case for market participants to have a firm grasp of the credit fundamentals of the banks they invest in or do business with. This is all the more important since regulators’ goals are to protect depositors and preserve financial stability, rather than to specifically shelter investors from losses. Scope’s ratings and analyses aim to address these challenges.

The following updated methodologies were authored by Sam Theodore and Pauline Lambert respectively and can be accessed on the links below:

• Bank rating methodology
• Bank capital instruments rating methodology