The world’s largest banks are better equipped to handle the current crisis than the rest of the sector as a result of regulation and restructuring imposed after the 2008 financial crisis, Moody’s said Thursday.
Thirty “global systemically important banks,” meaning lenders that are considered essential for the function of the global financial system, benefit from cleaner balance sheets, stronger capital and better liquidity than during the last financial crisis, the ratings agency said in a report.
Of the systemically important banks, 25 have a stable outlook. Credit Suisse is the only one to enjoy a positive outlook, while Wells Fargo, HSBC and Deutsche Bank have negative outlooks. Morgan Stanley’s outlook is currently under review.
Moody’s expects the 30 largest banks to generally outperform the other banks it rates.
“Without question, the deep changes to balance sheets and business models at many of these large institutions made in the past 10 years have been critical to their current resilience, even in light of the breadth of this crisis,” said Peter Nerby, a senior vice president and co-author of the ratings agency’s report.
The term “systemically important bank” is a result of post-2008 reforms, when the Financial Stability Board and the Basel Committee on Banking Supervision sought to identify institutions that were integral to the global economy.
The group comprises a wide range of financial institutions, including investment banks such as Goldman Sachs, universal banks such as Toronto-Dominion Bank, and state-owned Chinese banks such as the Agricultural Bank of China.
Overall, the largest banks benefit from stronger anchor franchises in home or specialty markets, including many that occupy leading positions in retail deposit gathering. Banks that engage in riskier activities, such as JPMorgan Chase and Goldman Sachs, have stronger home market anchors and more effective risk management than during the last crisis, according to Moody’s.
“While some of these financial institutions were right at the center of the previous financial crisis — from 2007 through 2009 — these new industrywide provisions put them in far stronger positions to withstand the current financial situation and economic slowdown,” Moody’s said.
The ratings agency attributed much of the banks’ strength to government stress testing, tougher regulation of amount and quality of capital, restrictions on leverage, better risk weighting and more overall regulatory scrutiny. Smaller banks have generally not faced the same regulatory heavy-handedness as banks deemed irreplaceable in the global financial system.
“The restructuring ax fell especially hard on many capital markets platforms, and the freewheeling booking of proprietary trades and carry profits was sharply curtailed,” Moody’s added in a full copy of the report provided to Fastinform. “Slimmed-down firms then redirected their remaining capital markets capabilities to service customer flows. In the first half of 2020, as the COVID-19 pandemic roiled global markets, the survivors booked rich profits providing liquidity.”
Credit Suisse, the only top-30 bank with a positive outlook from Moody’s, posted its highest net income in a decade during the first half of this year.
Deutsche Bank, one of the banks with a negative outlook, is facing widening scrutiny from U.S. and other authorities over its dealings with the now-deceased disgraced financier Jeffrey Epstein, a suspected conspiracy to rig the price of U.S. Treasurys and its hiring of people with ties to the Chinese government.
Critics of Moody’s argue that the ratings agency’s optimism about banks should be taken with a grain of salt given its role in the 2008 financial crisis. In 2017, Moody’s paid $864 million in fines to U.S. authorities over its high ratings of toxic mortgage securities during the run-up to the Great Recession.