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Staying One Step Ahead of Credit Events for Banks

During our recent webinar, “When Banks Default, How Much Can Be Recovered? One Year On”, S&P Global Market Intelligence estimated default risk and Loss Given Default risk (LGD) for banks globally as part of our analysis on regulatory stress tests and the general health of banks.

During this analysis we considered both rated and unrated banks globally. For the purpose of this blog, rated banks are those institutions which have been assigned a credit rating[1] from Standard and Poor’s Ratings Services only and likewise unrated banks, by definition, are those which have not been assigned a credit rating.

Banks, due to their very nature, require and rely on these ratings for a host of business critical processes including the issuing of debt. Standard and Poor’s Ratings Services rates approximately 2,000 banks[2], but the amount of banks globally is estimated to be ten times this number. Credit ratings are one answer to the question of relative default risk. In isolation however, they do not allow market participants to reflect alternative views or undertake scenario analysis, both of which are crucial for astute risk management. Compounding this issue is the fact that reliable estimates of LGD are almost non-existent in the wider market place, leaving bank counterparts with only half the picture.

237 rated banks were utilised for the analysis conducted within the webinar. In order to increase the sample size we assigned credit scores[3] to an additional 145 banks which were not rated by Standard and Poor’s Ratings Services (i.e. unrated banks sample) to give total sample of 382. Interestingly, the average credit rating on the rated sample is “BBB”, whereas the average credit score for the unrated sample is “bb-”. The difference is material at four notches, where one notch is the relative difference between any two adjacent ratings/credit score grades. The table below shows the average credit ratings and average credit scores for our sample segmented by region/country. The sample sizes are captured in the parenthesis.

When Banks Default, How Much Can Be Recovered?

Moving on to Loss Given Default for senior unsecured creditors, we also find a notable difference between the LGD expectations for rated banks vs. unrated banks from a global perspective. LGD for the rated sample is 3% lower at 60% relative to 63% for the unrated population of banks. Interestingly, this does not always hold when reviewing regional data, which further complicates matters. The table below captures the average LGD for banks from each region in our sample with the addition of Russia and Turkey (sample sizes are captured in the parenthesis). 

When Banks Default, How Much Can Be Recovered?

Concluding Thoughts

There are many causes for the differences in the average credit risk of the rated and unrated populations and the sample sizes will 

inevitably impact conclusions, but the following points provide food for thought:

  1. The default risk, in general, is notably greater for unrated banks.
  2. The LGD risk can vary with no particular trend between rated and unrated banks, pointing to the critical importance of estimating LGD for both rated and unrated banks alike.

Couple this with the lack of information available for unrated banks, often relatively small and private, bank counterparts are left in a position of uncertainty.

Please watch out for the upcoming instalments in our blog series:

  • Assessing the Unassessed whilst Maintaining Comparability
  • Your Two Cents’ Worth: Reflecting Your View in Credit Scores
  • Moving beyond Bank Default Risk: Loss Given Default

If you’re interesting in finding out more about the data and analytics discussed here, please follow the links below to:

Request more information on our Loss Given Default solutions.

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[1] Credit scores are a view of default risk generated by S&P Global Market Intelligence models and although they may be driven by Standard & Poor’s Ratings Services credit ratings criteria, they do not constitute a Standard & Poor’s Ratings Services public credit ratings. These credit scores are therefore displayed with lowercase letters to distinguish them from the public credit ratings issued by Standard & Poor’s Ratings Services, which is analytically and editorially independent from any other analytical group at McGraw Hill Financial.

[2] Standard & Poor’s Ratings Services ratings express the agency’s opinion about the ability and willingness of an issuer to meet its financial obligations in full and on time.

[3] As of 22nd March 2016.

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Mar 10, 2016