S&P Lowers Ratings on European Banks Over New Rules

Standard & Poor's ("S&P") Ratings Services, part of McGraw Hill Financial MHFI, has cut long-term ratings on major U.K., Swiss, German and Austrian banks. This move comes in the wake of the agency's review of ratings, as a result of the newly enacted legislation that implemented the bail-in rules from the European Union's ("EU") Bank Resolution and Recovery Directive ("BRRD"), effective Jan 1, 2015.

S&P reviewed the ratings of systemically important banking groups, seven in the U.K., five in Germany, and three in Austria. Some of these banking groups are HSBC Holdings plc (HSBC), Barclays PLC BCS, Lloyds Banking Group plc LYG, Standard Chartered PLC and The Royal Bank of Scotland Group plc RBS.

The agency also reviewed non-operating holding companies ("NOHCs") of the U.K. banking groups, along with Credit Suisse Group AG CS, the only rated NOHC of a systemically important Swiss banking group. However, S&P did not review the operating companies of systemic Swiss banks as it believes that government support will be available to these companies for now.

What Prompted Ratings Cut?

In Apr 2014, the EU adopted new rules with an aim to minimize risks and losses in case of bank failure. The law led to the creation of a regulatory body that would unwind or reorganize failing banks. Further, under the new rule, banks' creditors take the responsibility of the losses, instead of the government.

The introduction of a new legislation under BRRD, that is intended to safeguard taxpayers' money in case of failure of major financial institutions, primarily led S&P to review the ratings. Under BRRD, lenders cannot seek support from government until their losses cross almost 10% of their liabilities and owners of preferred stock will also take a hit from losses.

Actions Undertaken

After the review of its ratings for the European banks, S&P undertook following rating action:

• Lowered long-term ratings on Barclays, HSBC, Credit Suisse and Lloyds, while affirming short-term ratings. Further, outlook remains Stable for these, except for Lloyds, which is Positive.
• Cut long-term as well as short-term ratings on Royal Bank of Scotland and Standard Chartered, with Stable outlook for both.
• Placed the long-term ratings on principal bank operating companies and certain affiliates of Standard Chartered, Royal Bank of Scotland and Commerzbank AG on CreditWatch with negative implication. The short-term ratings of these remain the same.
• Placed the long-term and short-term ratings on principal bank operating companies and certain affiliates of Barclays Bank PLC, HSBC Bank PLC, Lloyds Bank PLC, Santander UK PLC, Deutsche Bank AG DB, UniCredit Bank AG, Erste Group Bank AG and UniCredit Bank Austria AG, among others on CreditWatch with negative implication.

Road Ahead

Despite taking these rating actions based on the new rule, S&P continues to contemplate the manner in which the legislation would be implemented in reality. Further, the ratings of banks placed in CreditWatch List will be reviewed and actions will subsequently be undertaken by year-end.

We believe that reduced government support for banks, in case of failure, will make these financial institutions more resilient toward their business conducts. Further, the ratings might gear up the financial firms so as to tackle better another economic crisis.