DBRS Expands Its Floor Rating Concept to Denmark
DBRS has today expanded its floor rating concept for Critically Important Banking organisations (CIBs) to include Denmark. 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 Denmark, DBRS has assigned a floor rating of A (high) for senior long-term debt & deposits and R-1 (middle) for short-term debt & 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 Danish 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 Danish government will sustain its CIBs to ensure that its 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 Danish government clearly demonstrate its commitment to support its CIBs at the floor level. These actions include the guarantee scheme, the bank recapitalisation scheme, contingency plans for emergency support and other support measures. 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 Denmark. For CIBs whose ratings are higher than the floor, the existence of the floor rating clarifies the limitations to possible downgrades in the ratings of these institutions. 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 Denmark, DBRS has designated Nordea Bank Danmark A/S (Nordea Denmark) as a CIB in Denmark. Currently, Nordea Denmark’s ratings are above the floor and, as such, are not affected by the assignment of the floor. 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 certain banks, as reflected in its SA-2 support assessments. 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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