Credit Buoy

Bank Ratings Taking a Dip

deutsche bank tower-Imago-Ralph Peters
Rating agencies aren't signalling bright ratings for banks.
  • Why it matters

    Why it matters

    Shrinking government support for banks could see rating agencies downgrade their credit ratings, leading to higher investment risks for bank shareholders and creditors.

  • Facts

    Facts

    • Germany plans to introduce the new E.U. bank liquidation rules, known as the Bank Recovery and Resolution Directive, early, in 2015.
    • The early implementation is the main reason for credit rating agency Fitch to downgrade Deutsche Bank next year, and for Moody’s negative outlook for the German banking system as a whole.
    • Fitch concluded that Deutsche Bank faces a number of challenges that could end in substantial fines or costly settlements.
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    Audio

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One man’s meat is another man’s poison. While taxpayers will no longer be asked to pay up under the new liquidation plans for bank bailouts within the European Union, the plans increase risk for shareholders and bond holders, who will suffer in a worst-case scenario.

The move has prompted a reaction from the three top rating agencies, Fitch, Moody’s and Standard & Poor’s. The agencies are reviewing the creditworthiness of major banks, and many institutions can expect to see downgrades next year. In Germany, they are particularly focused on Deutsche Bank, a financial institution whose collapse , in theory, could threaten the global financial system.

Fitch announced that in the first half of 2015, based on current information, it will downgrade Germany’s largest bank from “A+” to “A,” which is still a high-quality rating. The rating agency said the reason for the downgrade is the loss of government support as a result of new E.U. bank liquidation rules, which Germany plans to introduce early, in 2015. Under those rules, known as the Bank Recovery and Resolution Directive, primarily creditors and shareholders will pay for a bank’s liquidation.

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