Standard & Poor's To Review Government Support In European Bank Ratings

Primary Credit Analyst: Stefan Best, Frankfurt (49) 69-33-999-154; stefan.best@standardandpoors.com Secondary Contacts: Richard Barnes, London (44) 20-7176-7227; richard.barnes@standardandpoors.com Alexandre Birry, London (44) 20-7176-7108; alexandre.birry@standardandpoors.com Giles Edwards, London (44) 20-7176-7014; giles.edwards@standardandpoors.com Michal Gur Kagan, Tel Aviv (972) 3-753-9708; michal.gur.kagan@standardandpoors.com Dirk Heise, Frankfurt (49) 69-33-999-163; dirk.heise@standardandpoors.com William Hynes, London +(44) 2071767231; william.hynes@standardandpoors.com Elena Iparraguirre, Madrid (34) 91-389-6963; elena.iparraguirre@standardandpoors.com Moritz Kraemer, Frankfurt (49) 69-33-999-249; moritz.kraemer@standardandpoors.com Luigi Motti, Madrid (34) 91-788-7234; luigi.motti@standardandpoors.com

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Standard & Poor's To Review Government Support In European Bank Ratings

Governments globally are ramping up reform activities in a bid to save taxpayers from financing future bank failures. At the same time, regulators continue to build and implement new resolution tools in readiness for the next financial crisis. We note in particular a move toward avoiding bail-outs (government support) by using bail-ins (burden sharing with investors, potentially including senior unsecured obligations). The urgency of these reforms varies by country, but we see those that suffered most during the recent financial crisis--the U.S. and Western Europe--at the forefront. These developments have already had an impact on our rating outlooks on eight U.S. bank holding companies. And, as they continue to evolve, they may have implications for our ratings on banks in Europe--particularly those bank ratings that we currently assess as likely to benefit from potential extraordinary government support. With the EU's proposed recovery and resolution legislation nearing finalization, we plan to review our ratings on European banks that benefit from uplift. Future support for European banks has been the most frequently asked question from investors in recent months. We plan to review our ratings by the end of April 2014. We expect any resulting rating actions would likely consist mainly of outlook revisions if we were to believe that the level of support a government would provide to banks were to change significantly. Such actions would be based on consistent assessments of support under our criteria (see "Banks: Rating Methodology And Assumptions," published Nov. 9, 2011). To do so, we could ultimately reclassify the country by its propensity to provide support, reclassify the specific bank's systemic importance, or widen the rating notching between the operating bank subsidiary and its holding company. Our review of bank ratings will take into account known and potential reform implementation milestones that we consider would likely trigger further rating actions in the next two years. We currently consider that subsequent medium-term rating actions would likely affirm or lower ratings by one or two notches depending on a bank's ability to adapt to the reforms. We will not review banks that we consider to be government-related entities unless we perceive that the government owner might be willing or obliged to cede its control in a bail-in scenario. We will update market participants if the timeline for our review alters. We indicated our intentions in past publications, most recently our Dec. 4, 2013 article "Resolution Plans For Global Banks May Eliminate Government Support For Some, But Progress Is Varied". We reiterate our view that the removal of government support from our global bank ratings is likely to be gradual and selective as regions move forward on reforms at varying speeds. We may begin to remove ratings uplift that reflects our assessment of the potential for extraordinary government support for senior creditors if we believe a resolution regime in any one jurisdiction is credible and predictable enough to substantially eliminate concern about contagion. We have already removed uplift for potential extraordinary government support from the ratings on subordinated instruments in many countries, particularly those where the bail-in of junior creditors is becoming a common practice in case of bank failure. Our focus is now on senior unsecured creditors of European banks that we consider to be systemically important and where we perceive a risk that they may also be subject to a bail-in. In our review of European bank ratings, we will assess the scope of the proposed resolution regime, the degree of policy flexibility that the government retains, and the

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Standard & Poor's To Review Government Support In European Bank Ratings

level of sovereign support that we may already include in the ratings on such instruments. In our report published Jan. 23, 2014 titled "Impact Of Government Support On The Issuer Credit Ratings Of The Top 100 Banks Globally," we provide details of the support components in our ratings on each bank listed, as well as the distribution of government support (see chart).

We consider that banks in the U.S. and Western Europe suffered most during the recent financial crisis and are at the forefront of the reform agenda. Other G20 countries, particularly those that host globally systemically important banks, are also active, as is the EU bloc as a whole. Many of these countries are honoring their G20 commitments by arming themselves with new resolution tools. However, because the design of these tools differs among jurisdictions, we have differentiated views about their likely timing and scope. In our view, the U.S. addressed weaknesses in its banking sector more quickly than most other countries following the global financial crisis and was among the first to design a comprehensive resolution regime. As a result, we revised our outlooks on the holding companies of the eight banking groups we deem to be highly systemically important in June 2013 (see "Various Outlook Actions Taken On Highly Systemically Important U.S. Banks; Ratings Affirmed," published June 11, 2013).

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Standard & Poor's To Review Government Support In European Bank Ratings

The U.K., Switzerland, and a few other jurisdictions have also taken a more proactive stance to prevent taxpayers bailing out failing banks in the future. In the EU as a whole, we observe an important milestone looming in the form of the Bank Recovery and Resolution Directive, which we currently believe the European Parliament will likely approve in April 2014. If approved, it is likely to be implemented on Jan. 1, 2015, although we do not expect its mandatory bail-in features to be implemented until Jan. 1, 2016.

Related Criteria And Research

Related criteria
Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Group Rating Methodology, Nov. 19, 2013 Assigning "Intermediate" Equity Content To "Tier 2" Bank Hybrid Capital Instruments, July 16, 2013

Related research
Impact Of Government Support On The Issuer Credit Ratings Of The Top 100 Banks Globally, Jan. 23, 2014 Resolution Plans For Global Banks May Eliminate Government Support For Some, But Progress Is Varied, Dec. 4, 2013 Various Outlook Actions Taken On Highly Systemically Important U.S. Banks; Ratings Affirmed, June 11, 2013 The Five Key Risks For European Banks, April 11, 2012
Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com

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