Moody's takes tougher line on bank debt
In a move that affects lenders including Commonwealth Bank, Westpac, ANZ, NAB and Macquarie, the credit agency made a two-notch cut to its ratings for subordinated debt, which ranks after other types of debt if a company fails. The decision does not affect the banks' overall credit ratings, which are critical for their ability to raise funds on global markets.
The change comes as regulators try to protect the financial system against moral hazard - where lenders and their investors take excessive risks in the knowledge they will be bailed out by government in the event of a collapse.
During the global financial crisis, governments tended to support struggling banks by injecting equity, which shielded bondholders from wearing losses.
But Moody's analyst Patrick Winsbury said there was a growing international trend of "selectively imposing losses" on investors in more junior types of debt.
"We recognise that Australian bank supervisors have, in the past, acted in a manner to support all bank creditors," he said. "However, the global financial crisis has demonstrated that support can be provided selectively and bank recapitalisation costs shared with subordinated creditors without triggering any contagion, as was previously feared."
At the height of the 2008 crisis, Australian banks and their creditors benefited from government guarantees of deposits and wholesale funding.
Recent rescue efforts in Europe, however, have inflicted losses on bondholders.
Moody's said the Australian Prudential Regulation Authority did not have an explicit power to impose losses on holders of subordinated debt. But it said APRA had the power to wind up ailing banks, and in a case of severe stress, these powers could be used to "coerce" subordinated debt holders into taking a haircut.
The type of bonds downgraded plays a relatively minor role in meeting Australian lenders' funding requirements - there was $21.8 billion in subordinated debt on issue at the end of June. This is less than 5 per cent of the total long-term outstanding debt of $478 billion.
The downgrade comes after a global body of regulators this week said G20 governments had more work to do in developing laws to stamp out the problem where banks were seen as "too big to fail".
The Switzerland-based Financial Stability Board's report said Australia had made good progress in recent legal changes to help "resolve" banks in financial strife.
Frequently Asked Questions about this Article…
Moody's cut its credit ratings for subordinated debt issued by Australia’s big banks by two notches. That means Moody's now views those junior bonds as riskier, although the agency did not change the banks' overall credit ratings.
The downgrade affected subordinated debt issued by Commonwealth Bank, Westpac, ANZ, NAB and Macquarie, according to Moody's commentary in the article.
Subordinated debt is a type of bond that ranks after other creditors if a bank fails, so subordinated bondholders are paid later and are more likely to absorb losses. Moody's downgrade signals that these junior creditors are now considered more vulnerable in a severe bank stress scenario.
No — Moody's said the downgrade applied only to subordinated debt and did not change the banks' overall credit ratings. The article notes overall ratings remain critical for the banks' ability to raise funds on global markets.
Moody's cited a global regulatory shift away from automatically protecting all creditors to avoid moral hazard. Regulators and international bodies have been moving toward selectively imposing losses on more junior debt, and recent European rescues showed bondholders can be asked to take losses.
Moody's said the Australian Prudential Regulation Authority (APRA) doesn't have an explicit power to impose losses on subordinated debt holders. However, APRA does have powers to wind up failing banks, and in extreme stress those powers could be used to effectively 'coerce' subordinated debt holders into taking a haircut.
Subordinated debt is relatively small: the article states there was $21.8 billion in subordinated debt at the end of June, which is less than 5% of the total long-term outstanding debt of $478 billion.
For everyday investors, the downgrade highlights that subordinated bank bonds carry higher risk of loss in a severe banking stress than senior debt or deposits. The banks' overall credit ratings remain unchanged, but holders of junior bonds should be aware they may be more exposed if regulators decide to share recapitalisation costs with subordinated creditors.
Call 1300 880 160
Start a chat
Schedule a call
