Moody's says Reserve Bank's rules on resolving bank failure could pressure bank credit ratings

Moody's Investors Service says the Reserve Bank's moves to set new rules around keeping banks open for business in the event of failure may heap more pressure on the credit ratings of the country's big four banks.

Moody's said today the central bank's Open Bank Resolution Policy might add negative pressure to the Aa2 long-term bank deposit rating it currently has on ANZ New Zealand, ASB Bank, Bank of New Zealand (BNZ), and Westpac New Zealand. This comes after the credit ratings agency announced in February it had put the four banks on review for a potential downgrade.

Now Moody's says the Reserve Bank's pre-positioning requirements that banks will be expected to comply with to fully implement its Open Bank Resolution Policy could add additional pressure. The central bank released a consultation paper on these earlier this month. Open Bank Resolution is a policy aimed at quick resolution of a bank failure in a way that the bank can be kept open for business, minimising stresses on the overall banking and payments system.

It's aimed at providing continuity of core banking services to retail customers and businesses, whilst placing the cost of a bank failure primarily on the bank’s shareholders and creditors rather than the taxpayer.

"In particular, 'pre-positioning' the banks -- that is to say, preparing their IT system design and documentation to allow a statutory manager to take control easily -- would make Open Bank Resolution a more viable policy option for large, complicated banks," Marina Ip, a Moody's assistant vice president and analyst, says. "This could challenge the rationale for including 1 notch of systemic support in the banks' long-term debt and deposit ratings."

"We will have to evaluate the Reserve Bank's and government's likely response in case of stress at a major bank, and the practical and operational feasibility of implementing the Open Bank Resolution policy as proposed."

The Reserve Bank says the global financial crisis highlighted the potentially enormous fiscal cost associated with supporting troubled banks. The government therefore needs Open Bank Resolution to be an operational and effective policy option for containing the cost of a bank failure, while not threatening the safety of the overall financial system.

"Banks are being consulted on the systems requirements that are needed to ensure the concept can be put into operation," the Reserve Bank says. “The design of major Reserve Bank prudential policies such as outsourcing and local incorporation will help to facilitate the implementation of Open Bank Resolution. The pre-positioning of banks’ internal systems represents the next stage in that implementation process.”

Submissions on the Reserve Bank's consultation paper close on June 30.

Moody's review of the big four banks credit ratings comes as it simultaneously reviews their Australian parents. Moody's also says it's looking at the Kiwi banks' structural sensitivity to wholesale funding market conditions given they source, on average, about 40% of their total funding from wholesale money resulting in a low liquid asset coverage of their wholesale liabilities. The review is due to be completed by mid-May.

Meanwhile, Moody's rival Standard & Poor's is reviewing the methodology it uses to rate banks which will potentially see its credit ratings on New Zealand banks lowered.

Read Moody's statement below:

Moody's Investors Service says that the Reserve Bank of New Zealand's ("RBNZ") Open Bank Resolution policy could create additional negative pressure on the supported debt and deposit ratings of New Zealand's four major banks.

Those banks are ANZ National Bank Limited, ASB Bank Limited, Bank of New Zealand, and Westpac New Zealand Limited, and all currently have long-term bank deposit ratings of Aa2.

"The ratings of the four are already under review for possible downgrade for reasons unrelated to the Open Bank Resolution, but the adoption of a pre-positioning mechanism could add further downward pressure to their supported deposit and debt ratings," says Marina Ip, a Moody's Assistant Vice President and Analyst.

Ip was speaking on the release of a Moody's special comment -- which she authored -- on the implications of the policy, which was referred to by New Zealand's Finance Minister in his statement on 11 March 2011.

"The Open Bank Resolution policy is designed to reinforce market discipline, by eliminating the need for the authorities to provide extraordinary support to a troubled bank for the purpose of maintaining its essential day-to-day operations and minimizing disruptions to the financial system," says Ip.

"Instead, the Open Bank Resolution would make bank shareholders, creditors and even depositors shoulder the losses of a failing bank, while ensuring that the payments system continues to function," adds Ip.

In particular, "pre-positioning" the banks -- that is to say, preparing their IT system design and documentation to allow a statutory manager to take control easily -- would make Open Bank Resolution a more viable policy option for large, complicated banks. This could challenge the rationale for including 1 notch of systemic support in the banks' long-term debt and deposit ratings.

"We will have to evaluate the RBNZ's and government's likely response in case of stress at a major bank, and the practical and operational feasibility of implementing the Open Bank Resolution policy as proposed," says Ip.

Moody's further notes that the consultation period set aside by the RBNZ for its proposal will end on June 30.