Going to be a lot of discussion on that today.
What was it booyah boy just said about bringing in corrupt lawyers and sitting around talking up phony BS to appease ignorant investors? Why won't that script work at the national level? Are YOU smarter than a 5th grader Vosilla? They are saying on cspan they dont want to bring in too much regulation, that market based solutions work best. So we send spanky and buckwheat into the room with evil banker who has more tricks than david copperfield and expect a "fair market" - forgive me for my ignorance - but I thought an educated borrower was required for such a thing, but the predators and lies and scams that are out there now, as booyah boy exposes, leaves little room for market based solutions when fighting these darth vaders! From cradle to grave americans are taught to depend on the gubbment to care of stuff, they are not prepared for a gubbment that fails them. THe gubbment protects and feeds and educates them, certainly the gubbment wouldn't let evil loan officers get poor dumb buckwheat into stuff over his head!
The yahoos in congress are talking right now that bank viability is not in jeopardy - but these guys say differently - apologies if it has been posted already:
cache.dbrs.com
Date of Commentary: March 12, 2007
DBRS’s U.S. Bank Ratings Based on Fundamental Strengths – No Additional Lift from External Support
Following the recent actions of a competitor credit rating agency, there has been significant investor interest in DBRS’s views regarding the likelihood of regulatory support for a failing U.S. banking institution. DBRS has released the following comment explaining how it assesses the impact of the regulatory environment with regard to its U.S. bank ratings.
DBRS’s bank-rating process is consistently applied globally. The intrinsic strength of the bank is assessed, then the probability of outside support is considered. At DBRS, we convey the probability of this outside support through our Support Assessment (SA) designation. For more information on Support Assessments, please see DBRS Announces Results of Implementing New Support Assessment Methodology for Banks.
The vast majority of U.S. banks have received an SA3, a designation that means that under most circumstances DBRS believes there is insufficient certainty that support would be forthcoming for a troubled bank. As a result, DBRS does not boost the vast majority of U.S. bank ratings beyond their assessed intrinsic strength. In the United States, DBRS has assigned the SA1 designation to just four banks to reflect their ownership by a foreign bank, and raised their intrinsic ratings accordingly.
DBRS CREDIT RATINGS INCORPORATE THE REGULATORY ENVIRONMENT
U.S. regulatory authorities give significant supervision and examination to the U.S. banking industry. Supervision and examination is carried out by a number of bank regulators including the Federal Reserve System (the Fed), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), as well as state banking regulators. An assessment of this supervision and examination is an important part of the analysis of the industry undertaken by DBRS, and has been an important ratings consideration since DBRS initiated coverage of the U.S. banking industry.
In our analysis of the U.S. banking industry, we recognize that one important goal of the regulators is to prevent systemic problems. Another important goal is to avoid losses for the FDIC deposit-insurance fund. As a result, extensive regulation, supervision and examination exist that are designed to significantly limit the risks that challenge the U.S. banking industry. U.S. regulators have robust structures in place that allow them to take pre-emptive action to help stave off the failure of a U.S. bank. History has shown that prompt corrective action is frequently taken by a bank’s primary regulator in the event that a bank deteriorates or deviates from best practices. Where a bank has a role such that its failure may lead to a threat to the entire payments system, regulatory and supervisory actions are likely to be more extensive. At DBRS, we do not believe there is an automatic correlation between size and regulatory action.
DBRS rates banks differently for a variety of reasons, including differences in franchise strength, management ability, earnings power and the assessment of risk profiles, as well as our view of the bank’s relationships with its regulators and the prevailing regulatory environment. At DBRS, we consider each of these factors as critical rating drivers. DBRS’s ratings are not based upon a mechanical model driven by a formulaic approach.
History has shown that regulators require changes in business plans, the sale of assets or any other action that can be executed that would lead to the restoration of a bank’s financial health. In the United States, competitive forces, the size of the market and the number of players make it more likely that the regulators would not support a bank in such a way as to keep it whole, but would find ways for other entities to assume certain systemically critical parts of that bank.
Financial Institutions Commentary 1
NO GUARANTEE OF FULFILLING FINANCIAL OBLIGATIONS IN STRESS SITUATIONS
Regulatory intervention, however, can lead to an uncertain outcome for bondholders. Regulators may put pressure on a bank-management team to sell or find other solutions to recapitalize the bank and restore it to a sound basis. Regulators have required bank managements to defer trust-preferred dividends, even when that bank was still meeting capital requirements.
Where a U.S. bank has deteriorated to the point that regulators decide that it needs to be resolved, the FDIC is charged with finding the least-cost resolution for the FDIC fund. In such a scenario, it is not certain that bondholders and other senior obligors will be paid in full. In limited circumstances, particularly when systemic risk is perceived, the FDIC, working with the other regulators, may inject capital and provide liquidity in order to keep the bank solvent while a buyer is found for it. In such cases, equity owners face losses, but bank-level bondholders are more likely to receive payment in full. However, in this scenario, the bank-holding-company (BHC) debt holders are less assured of being repaid unless there is substantial additional value in the troubled bank subsidiaries. This is because the failure of a BHC poses a more-limited threat to the stability of the payments system. Therefore, there is less incentive to support a BHC.
NO ASSURANCE OF BONDHOLDERS BEING PAID IN A FULL OR TIMELY FASHION
Given that the U.S. government does not explicitly guarantee the U.S. banking industry, bondholders cannot be assured that regulators will support troubled banks. What bondholders can be assured of is that the regulatory authorities will take pre-emptive action to try to avoid bank problems and failures. Consequently, DBRS is left with a plethora of outcomes for severe stress scenarios, especially since in certain instances bondholders will not be paid in full, or in a timely fashion.
Given the uncertainty of the outcome for a troubled U.S. bank, DBRS does not necessarily ascribe a substantial ratings benefit from supervisory support actions. There is no certainty as to which banks would be supported. Furthermore, in the event that a bank is supported, the extent to which that support would be forthcoming is also uncertain. If DBRS was certain of the level of support the regulators would provide the U.S. banking industry, DBRS could give all “to-be-supported” banks the same rating regardless of their financial health. Furthermore, having ascertained that the banks would be “supported,” we would continue to maintain ratings at their ascribed level, despite their deteriorating financial health.
However, as we outlined earlier, DBRS rates U.S. banks on a variety of different factors, including the fact that the prevailing regulatory environment lowers the risk of an abrupt collapse of a bank, irrespective of its size. It is worth adding that in the United States, there is neither a perceived need nor a political base for pressure to support national champions in the financial services industry. Such pressure is more familiar in other industries such as airlines, autos, steel, textiles and agriculture.
Moreover, legislation and regulation are moving to reduce governments’ ability to protect and support their banks, not only in the United States, but also in Europe and elsewhere in the world. Basel II is a prime example of stronger, more consistent regulation. As such, there is a powerful argument that bondholders need to place reliance upon the intrinsic strength of a bank, rather than counting on the regulators for support.
Financial Institutions Commentary 2
Contact Information:
Alan G. Reid
Managing Director
U.S. Financial Institutions Group
+1 212 806 3232
areid@dbrs.com
Roger Lister
Chief Credit Officer
U.S. Financial Institutions Group
+1 212 806 3231
rlister@dbrs.com
Peter Bethlenfalvy
Group Managing Director
Global Corporate Director
+1 416 597 7361
pbethlenfalvy@dbrs.com
Financial Institutions Commentary 3 |
