New York: Banks' financial strength won't return to pre-crisis levels even after new rules known as Basel III force them to raise as much as $890 billion (Dh3.2 trillion) of new capital globally, according to Moody's Investors Service.
Bank credit ratings are likely to deteriorate because the grades of some lenders presently benefit from the assumption they will receive government support in a crisis, Moody's said in a report.
That assumption is being withdrawn and banks with business models that rely on high levels of borrowing to boost returns are likely to take on more risk, potentially hurting creditors, Moody's said.
"The significant downward pressure on ratings from declining government support assumptions is unlikely to be fully offset by a strengthening of banks' standalone credit profiles in the near term," Moody's analysts Tobias Moerschen in New York and Alain Laurin in Paris said in the report.
They are "unlikely to raise their asset yields enough to offset the higher cost of funding and capital," they wrote.
Protecting taxpayers
Governments and regulators worldwide are seeking to ensure that banks, which have lost or written down more than $2 trillion since the third quarter of 2007, won't turn to taxpayers for support in another crisis.
That's forcing ratings firms to review the assumptions they make about nations' willingness to stand behind their lenders at the same time as the authorities demand banks hold more capital and more stable funding to back their activities.
Banks may have to hold as much as an extra $4.5 trillion in stable funding under the new rules, Moody's said. Basel III is likely to act as "a catalyst for change," Moody's said. Banks unable to meet the new standards may seek acquirers, who may demand bondholders accept losses, Moody's said.
They might turn to governments, which will be tempted to demand "burden sharing" from creditors, or wind down some or all of their operations, "with potentially adverse consequences for creditors," according to the report.
Smaller, deposit-funded lenders in developed markets, as well as regional leaders in emerging markets, probably won't be affected by the changes introduced by Basel III, Moody's said.