DBRS Expands Its Floor Rating Concept to Norway
DBRS has today expanded its floor rating concept for Critically Important Banking organisations (CIBs) to include Norway. Today’s announcement follows DBRS’s February 11, 2009, announcement introducing the floor rating concept, which is a refinement of DBRS’s approach to intrinsic and support assessments. For CIBs in Norway, DBRS has assigned a floor rating of A (high) for long-term debt and deposits and of R-1 (middle) for short-term debt and deposits at the bank level. In the cases where there is a holding company, the floor has been set at “A” and R-1 (middle). The trend on the aforementioned ratings is Stable.
The level of the floor reflects DBRS’s expectation that the Norwegian government will provide support, if necessary, to prevent any CIB from weakening below this rating level. DBRS views A (high) / R-1 (middle) as the level of creditworthiness that market participants demand for CIBs to be viewed as essential counterparties, as CIBs need to be perceived as reliable partners in undertaking a wide range of financial transactions. DBRS views the floor as the level of support at which the Norwegian government will sustain their CIBs to ensure that their financial system is fully functioning.
CIBs will usually be banking organisations that have extensive involvement in a country’s financial markets and perform critical roles in the flow of financial transactions. As such, the loss of the market’s confidence in a CIB’s ability to perform as a counterparty could negatively affect the market’s perception of other participants and lead to a degradation of the functioning of the financial markets.
In the view of DBRS, the actions taken to date by the Norwegian government clearly demonstrate its commitment to support their CIBs at the floor level. These actions include the establishment of the State Finance Fund to recapitalise banks, the establishment of the State Bond Fund that supports liquidity in Norwegian bond markets, and swap facilities and other liquidity support provided by Norway’s central bank. In effect, the intent of these policies and the related government actions can be taken to imply that there is a floor under the potential deterioration in the final ratings for CIBs in Norway. For CIBs whose ratings are higher than the floor, the existence of the floor rating clarifies the limitations to possible rating downgrades. Specifically, if downward ratings pressure occurs for a CIB which has a DBRS floor rating in place, once the floor rating is reached, any further weakening of the institution’s intrinsic assessment will not result in further downgrades of its final ratings, which will remain at the floor. Consequently, all ratings of CIBs that are at the floor will have a Stable trend.
Among DBRS-rated banks in Norway, DBRS has designated DnB NOR Bank ASA and Nordea Bank Norge ASA as CIBs. As both are currently rated above the floor, the introduction of the floor concept in Norway has no rating implications at this time. DBRS continues to monitor government statements and actions and may reconsider its views on which banks are considered CIBs, as warranted.
DBRS continues to ascribe implicit systemic support for rated banks in Norway, as reflected in the SA-2 support assessment. For institutions with a designated SA-2 support assessment, DBRS expects some form of external support, if needed, ideally with a timeliness element in it. The assignment of the SA-2 support assessment has typically resulted in the final ratings of such institutions being positioned one notch above the respective institution’s intrinsic strength. Not all banks with SA-2 support assessments have been designated as CIBs, as the CIB designation not only entails the expectation of some form of support, but the expectation that any CIB would receive sufficient support to maintain its credit profile at the floor rating.
Given the actions by various governments globally, DBRS continues to evaluate the applicability of floor ratings to other banking systems in other countries. The introduction of a floor rating is likely for a country where there has been significant deterioration in financial markets and where substantial explicit support is being provided to CIBs; or where the government has made explicit statements or acted so that implicit support can be inferred for its CIBs. Accordingly, where CIBs can be identified and a floor rating established, DBRS believes this provides clarity to the market on prospective rating actions for weakening institutions whose ratings are deemed to be underpinned by the floor. DBRS continues to assess the applicability of this concept for other countries.
If DBRS perceives that changes in policies or specific actions indicate that a government’s willingness to support its CIBs has changed, or if DBRS’s assessment of the respective government’s ability to provide such support changes, DBRS may revisit the established level of the floor or indeed the applicability of the floor concept for that country.
Note:
The applicable methodology is Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.
This is a Corporate (Financial Institutions) rating.
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