DBRS Releases Global Bank Rating Methodology

DBRS has released its Global Methodology for Rating Banks and Banking Organisations that has some snippets of interest for preferred share investors:

DBRS notes that the regulatory focus on Tier 1 capital is evolving with increased focus on core Tier 1 capital that excludes hybrids. We will adjust our methodology in the future to reflect any changes in emphasis or requirements.

To assess leverage, another capital measure that we employ is the ratio of Tier 1 capital to tangible assets. This ratio, or a variation of it, is applied to banks in a number of countries. It is generally more constraining than the Basel ratios, as assets are not risk-adjusted, although no adjustment is made for off-balance sheet exposures. We anticipate that there is likely to be pressure for adoption of some variation on this leverage ratio in more countries in the aftermath of the crisis.

Taking advantage of the regulatory risk weightings, DBRS considers the ratio of tangible common equity to RWA. Refl ecting DBRS’s preference for equity over hybrids as a cushion for bondholders and other senior creditors, this ratio excludes the hybrid securities that are given full weight by the regulators, up to certain limits.

In the light of Sheila Bair’s testimony to the Crisis Committee, the following extract is interesting:

By their nature, however, these businesses, if poorly run with inadequate risk management, can detract from a bank’s strengths and constrain its ratings. It is worth noting again that while banks had extraordinary losses in their trading businesses in this cycle, most of the losses were concentrated in few business lines, primarily in certain areas of fi xed income, related to origination, structuring and packaging various forms of credit and more complex securities. Risk management of trading activities was predominantly successful in helping banks generate revenues and earnings across many of their trading businesses. The analysis focuses on the trading and other capital markets businesses, but does not ignore other exposures to market risk.

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