German Bank Downgrades By Moody's

Germany is assumed to be the home market of some of Europe’s most stable banks because of the relative stability of its economy. Moody’s has undermined that view as it cut ratings of seven banks there, including Commerzbank, the second largest firm in the country. The move was the result of worry over exposure to debt issued by some nations in the region that are now in financial trouble. And the banks Moody’s singled out have less than adequate balance sheet to handle a major shock to the region’s credit system. Moody’s wrote:

Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity. The key drivers of today’s rating actions on German banks are:

– Increased risks to asset quality for the banks affected by today’s actions due to their exposures to asset classes prone to further deterioration if downside risks from the euro area debt crisis and the weakened global economic outlook materialise.

– Limited loss-absorption capacity, given the comparatively small equity cushions relative to total assets (not risk-weighted) and low pre-provision earnings. As a result, many German banks have limited capacity to absorb losses out of earnings, raising the potential that capital could diminish in a stress scenario.

Douglas A. McIntyre