A host of announcements related to banks made during the G20 Summit in Seoul last week could be credit negative for senior creditors of some banks, Moody's Investor Services said in a note.
The announcements include the Financial Stability Board's ambitious roadmap for reducing moral hazard risks posed by systemically important financial institutions (SIFIs), as well as the endorsement of reforms proposed by the Basel Committee for Banking Supervision on capital and liquidity, the agency said.
Because implementation of the FSB's proposals will make it easier to impose losses on unsecured and uninsured creditors of large, globally interconnected banks (e.g., burden sharing), the announcements are credit negative for senior creditors of such banks, Alain Laurin, Senior Vice President at Moody's, said in a note.
The endorsement at the summit for the Basel III proposals and FSB will likely improve the soundness of banks, Laurin added.
This is positive for creditors and partially offsets the negative implications of the drive towards 'burden sharing.'
Efforts are being made in several jurisdictions to facilitate an orderly wind-down of SIFIs and to impose losses on debt holders of SIFIs that need government support.
The failure of the SIFIs could destabilize the financial system.
Member countries of the G20 were expected to come up with rules to regulate these banks that are too big to fail during the recent summit at Seoul. However, the G20 failed to agree on detailed rules for dealing with these banks.
The G20 tasked the Basel Committee on Banking Supervision to complete a study on additional loss-absorption requirements for SIFIs, Laurin said.
The agenda endorsed by the G20 Summit in Seoul is far reaching. We expect banking industry resistance to the FSB proposals, as banks already face stricter capital and liquidity requirements from Basel III, he added, stating it remains to be seen whether the member countries will be able to convert the agenda to action.
The targets endorsed by the G20 group support Moody's view that the 'extraordinary levels of systemic support SIFIs and their creditors received during the financial crisis will decline.