Bank Credit Implications of U.S. Senate
Financial Sector Regulatory Reform Bill
The amendments included in U.S. Senate Bill (S. 3217) support our earlier credit impact
assessment of the Dodd Bill1
Regarding our assessment of stand-alone bank financial strength, as indicated by our Bank
Financial Strength Rating (BFSR), the amendments would contribute further to the de-
risking of the U.S. banks’ operations. The momentum in favor of better capital helps
address our concern about the permanency of the sizable amount of capital raised by banks
in the past year. Other provisions, such as stronger liquidity buffers and a reduction in risky
activities, would also have positive credit implications. However, we note that some of the
bans and restrictions on business activities would undermine banks’ profitability.
Consequently, with higher capital requirements, a bank’s ability to cover its cost of capital
declines, which can negatively affect its franchise and/or encourage risk taking elsewhere.
As we consider the likely future path of banks’ stand-alone credit worthiness, we note that
the sizable marks and reserves that the banks have taken in the past three years, coupled with
their also sizable capital raises, helps to create a platform for improved BFSRs compared to
today’s levels (the current US bank median stand-alone BFSR is C, which maps to A3 on the
long-term scale). However, we don’t see BFSRs returning to pre-crisis levels (the early 2007
US bank median stand-alone BFSR was B-, which maps to A1 on the long-term scale). In
particular, the cyclicality of the business will likely continue to routinely undermine the
credit profile of a sector that is structurally leveraged; in the context of lower profitability,
this challenges the durability of bank franchises, particularly during periods of stress.
Regarding bank holding companies’ and banks’ long term senior debt and deposit ratings,
which incorporate our assump