S&P: Why we changed the way we look at banks

The ratings agency’s new criteria aims to keep an eye on banks’ creditworthiness as the global banking sector looks to reinvent itself.

The global banking sector is at a crossroads, following the unprecedented turmoil of the past four years.

As it seeks to reinvent itself, the sector faces several critical inflection points that will affect the future creditworthiness of banks.

It is too early to tell how each one will play out but we believe our new banking criteria provides a coherent, globally consistent framework to assess how these developments are likely to affect the creditworthiness of banks. 

Power shift

The first major inflection point currently facing the banking sector is a potential shift in the power balance of global banking between banks in the developed markets of Western Europe and the US on one side, and the larger emerging countries in Asia and Latin America on the other.

The developed banking markets in the US and Western Europe are under pressure and a recovery is still not assured.

At the same time, banking systems in Latin America, Emerging Europe and Asia-Pacific are growing but, in our view, remain constrained by relatively weak financial infrastructure, institutional and legal frameworks, underwriting standards, payment cultures and rules of law.

Regulatory uncertainty

The second inflection point is the continuing regulatory uncertainty facing banks.
While many attempts at regulation on a global basis have been tried, devising a universal system promises to be a thorny and potentially elusive quest.
The prospect of unintended consequences is high, the impact of which will take years to manifest. This developing regulatory backdrop may set the scene for a decline in revenues for traditional regulated banking and a growth in volumes for shadow banking and disintermediation.

Government support

The third inflection point is the potential consequence of a change in the nature of government support for banks. The intervention of governments and central banks around the world has succeeded in creating an interim period of stabilisation for many of the Western European and the US banking systems. But, as the events of the last few months have shown, it is a fragile peace.

We believe governments are looking for ways to reduce their contingent risk to the banking sector, but not at the expense of undermining the financial system.
The recent bailout of Dexia, alongside the extension of new liquidity measures and the expected €108 bn capital raising for eurozone banks, demonstrates the economic realities that governments face and the real support they need to provide despite any longer term political will to reduce it.