Moody’s reassessing assumptions on a government’s capacity to provide support for financial institutions

22 Jul 2020 / 22:47 H.

KUALA LUMPUR: Moody’s Investors Service is in the midst of reassessing the support assumptions to reflect its assessment of a government’s capacity to provide support, represented by its sovereign ratings and the probability of it committing public funds to support particular financial institutions.

In a statement yesterday, it said bank failures have happened in all the markets they cover in Asia-Pacific (APAC), except in Singapore.

“As a result, we do not assume that all distressed banks would automatically receive timely support from their governments to avoid default or closure,” Moody’s said.

Moreover, it said its assessment also incorporates the potential evolution in government support as regulators gain more power or tools to deal with ailing financial institutions, or as political environments change to make the failure of the financial institution and senior credit losses more acceptable.

“This raises the possibility that APAC authorities will resolve financial institutions in ways different from previous crises, justifying our reassessment of our government support assumptions,” it explained.

Troubled banks, for example, Sime Bank and Bank Bumiputra and finance companies in Malaysia were merged into other banking groups in the years after the Asian financial crisis.

Moody’s said APAC authorities have moved slowly on reforming their resolution regimes for financial institutions. These reforms are not limited to banks but are mostly bank focused.

“Even for banks, only moderate progress has been made since November 2017, when we published a report on APAC’s bank resolution reforms. The changes so far have not indicated a substantial change in resolution approach or probability of government support for bank senior creditors,” it said.

In most APAC jurisdictions, authorities still lack statutory powers to bail in senior creditors and APAC authorities can however achieve effective bail-ins by exercising powers to transfer select assets and liabilities.

This provides an effective and flexible tool to achieve burden-sharing with a wider pool of investors and thus reduce the use of public funds in the absence of a formal bail-in regime.

Many regulators have expressed a desire to reduce the moral hazard that comes with blanket bailouts.

However, they also face the risk that burden-sharing could lead to business and market disruptions at other banks because of contagion. – Bernama

Moody’s says Asia-Pacific authorities have moved slowly on reforming their resolution regimes for financial institutions. – REUTERSPIX

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