The ratings change was spurred by the approval by the European Parliament of the European Union’s Bank Recovery and Resolution Directive on April 15. Essentially the directive leaves the banks’ senior unsecured creditors holding the bag when “extraordinary” government support for the banks disappears in January 2016.
In other words, the European banks will no longer use taxpayer money to bail out a failing bank. To S&P that means that government support for the banks will diminish over time and it raises questions about whether and for how long European governments would be able to support senior unsecured creditors. That unpredictability led to the downgrade.
Some of the banks affected by the lowered outlook are ABN Amro, Bank of Ireland (NYSE: IRE), Barclays PLC (NYSE: BCS), Credit Suisse Group Ltd. (NYSE: CS), Deutsche Bank A.G. (NYSE: DB), ING Bank and UBS A.G. (NYSE: UBS).
In its review of Deutsche Bank, for example, S&P noted, “[W]e consider that Deutsche Bank has ‘high’ systemic importance to Germany, which we view as ‘supportive’ of private-sector commercial banks.” But regarding the outlook downgrade S&P said:
The negative outlook indicates that we may lower the ratings on Deutsche Bank by year-end 2015 if we believe there is a greater likelihood that senior unsecured liabilities may incur losses if the bank fails. Specifically, we may lower the long-term counterparty credit rating by up to two notches if we consider that extraordinary government support is less predictable under the new EU legislative framework.
S&P’s outlook downgrade recognizes the fact that without government backing, these banks will have to depend on their creditors to make good the losses. Just a word to the wise at this point.