A Fresh Approach to Evaluating Bank Credit
We're now dividing banks into peer groups, comparing sytematically important banks separately from regional banks, says Erin Davis.
Erin Davis: We're excited about the updated bank credit rating methodology that we rolled out in September, as it will allow us to compare and rate banks around the world under one transparent methodology.
Our updated methodology is built on the same four pillar measurements before: business risk, solvency, a stress test, and a market-driven metric we call distance to default. However, there are also some significant updates. Perhaps the most important is that we're dividing banks into peer groups within the two pillars where we compare the bank we're looking at to other banks. We're comparing banks like JPMorgan and Citi that regulators view as systemically important to about 100 other systemically important banks around the world. Then we're comparing U.S. regional banks to one another. We've found that systemically important banks have truly different business models than regional banks, and that these business-model differences matter much more than geography.
We've retained a material weight on accounting measures of capital. While we're putting more weight on regulatory measures of capital, we're also taking the lessons of the great financial crisis seriously. Sometimes the biggest risks can't be measured well in advance, and the strongest banks are likely to be the ones with the most capital to absorb unexpected losses.
We've already rolled out some updated U.S. bank credit ratings under the updated methodology, and we plan to introduce credit ratings on European banks by the end of October.