Fitch Installs Its Own Glass-Steagall

Yves here. Fitch tries to position itself as the “we try harder” ratings agency, taking more aggressive ratings actions relative to Standard and Poor’s and Moody’s. For instance, it started issuing warnings about and then downgrading CMBS before its two larger competitors pre-crisis. The open question here is whether other bond graders will follow its lead.

By David Llewellyn-Smith, the founding publisher and former editor-in-chief of The Diplomat magazine, now the Asia Pacific’s leading geo-politics website. Cross posted from MacroBusiness.

There have been times in the last couple of years when the GFC-chastened ratings agencies appeared to be racing one another back to some position of credibility faster than the world could bear. Well, that race is surely over now, with Fitch announcing after US trading the mother of all downgrade watches on, well, everybody.

You simply must read the rationale for the reviews posted below from Zero Hedge. It is, in effect, a private version of Glass-Steagall – the Depression era legislation that separated the trading and commercial banks in terms of public supports. Fitch is downgrading pretty much any “trading” or “universal” bank that is reliant on trading, short term wholesale funding and leverage. To avoid downgrade they will have to “maintain particularly strong levels of retail funding, liquidity and capital”.

Well, global regulators have done their best but dithered, really. So here we are. A private sector wake up call. Go Fitch!

Full release on the downgrade watch:

Fitch Reviewing Global Trading and Universal Banks; Places Seven on Rating Watch Negative

In conjunction with a broad assessment of the ratings for the largest banking institutions in the world, Fitch Ratings is conducting a review of the global trading and universal banks in its rating portfolio. As part of that review, Fitch has placed the Viability Ratings (VRs) of seven and the long-term Issuer Default Ratings (IDRs) of six global trading and universal banks on Rating Watch Negative. At the same time, Fitch has placed the short-term IDRs of four of the banks on Rating Watch Negative.

The banks impacted by these rating actions are as follows:

Bank of America
Barclays Bank plc
BNP Paribas
Credit Suisse AG
Deutsche Bank AG
The Goldman Sachs Group, Inc.
Morgan Stanley
Societe Generale

Fitch expects to resolve the Rating Watch Negative within a short time frame and to take corresponding rating actions where warranted.

A list of each bank’s key impacted ratings follows at the end of this release. Full lists of impacted ratings are contained in the individual rating action commentaries on each of these firms, which are available at ‘‘. Barclays Bank plc’s rating action was addressed earlier today; for details see ‘Fitch Lowers UK Support Rating Floors; Downgrades Lloyds, RBS to ‘A”.

Fitch expects that any downgrades of these banks’ VRs would in most cases be one notch and at maximum two notches. Most actions on the long-term IDRs will be limited to one notch as IDRs will not fall below the banks’ Support Rating Floors when applicable. Short-term IDR implications will also likely be a one-notch downgrade for those banks whose ratings are on Rating Watch Negative. It also possible that certain banks could have their ratings affirmed at current levels. Fitch also expects that many of these ratings should revert to Stable Outlooks upon resolution of the Rating Watches.

The resolution would be based on the conclusion of Fitch’s review of the issuers. Fitch expects to engage with the issuers and review any new or additional information that is relevant to their ratings. Fitch will also consider the absolute and relative ratings of each issuer put on Rating Watch today in the context of other global financial institutions.

The placement on Rating Watch Negative of these global trading and universal banks’ VRs reflects Fitch’s view that these institutions’ business models are particularly sensitive to the increased challenges the financial markets are facing. These challenges result from both economic developments, particularly in the euro area, as well as a myriad of regulatory changes.

Fitch also notes that these actions are not tied to any specific earnings information as this review has been ongoing for some time. The review is motivated by Fitch’s evolving concerns about aspects of these business models and the structural challenges they face, particularly during periods of market stress.

However well-managed, the structural aspects of their funding, earnings, and leverage, predispose trading and universal banks to greater vulnerability to market sentiment and confidence, particularly during periods of exogenous financial stress. Furthermore, the complexity of their business models and exposure to fat tail risk make it more difficult to assess the size of loss that could emerge rapidly from unexpected events.

These seven banks are among the largest global trading and universal banks. Trading businesses exhibit high reliance on short-term wholesale funding and to varying degrees what Fitch views as more volatile earnings than commercial banking, and with more opaque risk. These factors drive Fitch’s expectation of more robust liquidity and higher capital than commercial banks to retain ratings in the single ‘A’ range. Fitch considers it highly unlikely for a bank whose business model is strongly weighted to trading operations to remain in the ‘AA’ range, and any universal bank rated in that range would have to maintain particularly strong levels of retail funding, liquidity and capital. The seven banks remain highly rated firms that largely have strong credit profiles.

While Fitch considers dependence on trading activity and particularly volatile trading activity to differ among this group of banks, it is also Fitch’s view that a number of additional factors need to be taken into the balance. Among these, Fitch looks at the dominance of a bank’s position in various markets, track records established in each business and barriers to entry and specific challenges facing the commercial banking arms of universal banks. Given the complexity of the business, the degree of transparency achieved in external reporting is also an important factor in Fitch’s rating assessment.

Fitch recognizes that these institutions are diverse both in terms of product scope and geography and are among the largest in the world. However, recent history demonstrates that large banks can fail. Furthermore, diversification can have both positive and negative implications. Fitch believes that it is the tendency for asset correlations to converge during times of stress, as witnessed during the 2008 financial crisis. While this is not a new discovery, Fitch believes it is still important to highlight in the context of this rating comment.

Importantly, Fitch also recognizes that individual firms demonstrate varying degrees of resiliency to these concerns, which is driven in part by such key intangible factors as corporate governance, management depth and experience, risk management culture, and so forth. Fitch will continue to weigh these factors in its assessments.

Fitch’s rating review includes a broader base of global trading and universal banks. Fitch believes that the institutions placed on Rating Watch Negative are more susceptible to rating downgrades because of their relative sensitivity to the rating attributes outlined above and their relatively high current ratings. Also, some of these banks face challenges from developments in the euro area.

Fitch has taken no action on Citigroup, Inc.’s and JPMorgan Chase & Co.’s VRs, Long-term IDRs and Short-term IDRs. Rating actions on IDRs of UBS AG and The Royal Bank of Scotland plc were taken as a result of revisions to the Support Rating Floors. (Please refer to ‘Fitch Comments on Support for Euro Banks; Takes Various Support-Driven Actions’ dated Oct. 13, 2011 and the individual issuer commentaries for additional details.) The VR of Bank of America Corporation was also placed on Rating Watch Negative as part of this broader review, and additional ratings drivers are discussed in its individual issuer commentary.

Fitch highlights that other firms are not immune to these challenges, and many other financial institutions, particularly in the euro area have also been subject to negative rating actions by Fitch this week. For more details on Fitch’s European rating actions, please refer to the following releases:

–’Fitch Takes Rating Actions on Major Spanish Banks Following Sovereign Downgrade’, Oct. 11, 2011;

–’Fitch Takes Rating Action on Major Italian Banks Following Sovereign Downgrade’, Oct. 11, 2011;

–’Fitch Comments on Support for Euro Banks; Takes Various Support-Driven Rating Actions’, Oct. 13, 2011;

–’Fitch Places Five Major European Commercial Banks on Rating Watch Negative’, Oct. 13, 2011.

Furthermore, Fitch acknowledges that many of these global financial institutions demonstrate stronger fundamental financial metrics than they had preceding the start of the financial crisis in 2008, and some have lower ratings than they did at the time.

Nevertheless, Fitch considers the potential for these negative rating actions to be warranted by the structural challenges these firms’ business models face. These challenges stem from intensified regulation, heightened funding costs, intense competition to remain a top tier player, and changing risks in an industry of constant and rapid innovation and interconnectedness with developments in the rest of the industry and the global economy.

For additional perspective see the individual rating action commentaries for each of these institutions and the report ‘Rating Banks in a Changing World’, dated Oct. 13, 2011.

Fitch has placed the following ratings on Rating Watch Negative:

Bank of America Corporation

–Viability Rating (VR) ‘a-’.

Barclays Bank plc

–Viability Rating ‘aa-’;

–Long-term IDR ‘aa-’;

–Short-term IDR ‘F1+’.

BNP Paribas

–Viability Rating ‘aa-’;

–Long-term IDR ‘aa-’.

Credit Suisse AG

–Viability Rating ‘aa-’;

–Long-term IDR ‘aa-’;

–Short-term IDR ‘F1+’.

Deutsche Bank AG

–Viability Rating ‘aa-’;

–Long-term IDR ‘aa-’.

The Goldman Sachs Group, Inc.

–Viability Rating ‘a+’;

–Long-term IDR ‘a+’;

–Short-term IDR ‘F1+’.

Morgan Stanley

–Viability Rating ‘a’;

–Long-term IDR ‘a’;

–Short-term IDR ‘F1′.

Societe Generale

–Viability Rating ‘a+’.

Print Friendly, PDF & Email


  1. Brett

    Sounds interesting… but where is UBS on this list? They did just have a $2 billion out of no where loss from a “rogue” trader.

    One thing I have trouble understanding is how risk management can be competently performed in any bank that trades in complex derivatives. As you write in Econned, the position of Risk Manager is a joke as they will continuously get overruled or blamed for costing the company money if they prevent trades that are profitable today but could blow up in the future.

    This seems like a fundamental problem with modern banking. The only solution seems to be to prohibit the trades in the first place, because even a “small” bank could find itself in trouble if it accepts a bunch of liabilities that it doesn’t understand. Think that AIG was brought down by a tiny part of its company, AIG Financial Products, which was run by moron who didn’t understand what sort of risks he was taking.

  2. Kevin Murphy

    Could there be hope that the “market” will eventually punish these firms enough that they will be forced to restructure is a way that benefits society? They way they used to be?

    1. Nathanael

      Unfortnately there’s always a market for corrupt ratings agencies.

      One of the ways Fitch maintains higher standards is by simply refusing to rate things they know they don’t understand. If you’ve ever noticed that almost *everything* has a Moody’s rating and an S&P rating, but only *some* things have Fitch ratings, you’ll see what I mean.

      So the people manufacturing the incomprehensible crap will continue to pay Moody’s and S&P. This will keep them afloat for a long time.

      It’s amazing how long companies can continue as, essentially, fraud shops. Merrill Lynch has long had among the worst reputations of any brokerage in the US, dating back to the 19th century — they gouge their customers pretty much routinely, and arguably cheat them (illegal “account closure fees” being the scam we got hit with after Merrill Lynch bought out our former brokerage). Yet they keep going and going because there’s always enough ignorant people to be fleeced.

      I expect S&P and Moody’s to continue serving financial scam artists, and I expect the sheep-to-be-fleeced market to continue to lap it up for a long, long time.

  3. Pixy Dust

    A private version of Glass-Steagall?
    Sounds like more “self-policing”.
    But it does make for good PR.

Comments are closed.