Tom Hunt, Director of Treasury Services, AFP
Deposit ratings are the latest instrument in rating agencies’ toolkit. They can be particularly useful for corporate treasurers, because they give you a better view of how vulnerable your bank deposits are.
Moody’s and Fitch have both launched their own versions of deposit ratings, and Standard & Poor’s has one in the works. I spoke with Moody’s recently about these new ratings, and they clarified that they’re not actually credit ratings. Rather, it’s a liquidity rating, which is a bit like a money market fund rating.
These ratings can be very valuable for treasurers in terms of managing bank relationships, as it’s essentially a new data point for determining counterparty risk as they assess their share of the wallet. So if one bank’s rating a little bit lower than you thought, it might be worth paring back a little bit on your deposits or direct investments with that institution.
Moody’s and Fitch are doing these ratings in different regions, and it is important to understand the nuances that could impact the ratings themselves. Some ratings might be lower or higher in say, Asia-Pacific, than Europe or the United States. A lot of it could be subject to what the underlying governmental support is for a particular region, or the overall economy in that marketplace.
Now, as Moody’s explains in an upcoming AFP Exchange article, the prospect of banks defaulting on these obligations, such as covered bonds and derivatives, is likely lower than before the financial crisis, due to Dodd-Frank regulations. Of course, all of that is up in the air now, given that portions of Dodd-Frank are on the chopping block. Therefore, it is critical that corporate treasurers have an accurate reading of their banks’ risk of default.
Treasurers can no longer rely on insufficient indicators. On the whole, treasurers have been sticking to standard credit ratings and credit default swap spreads and trying to make determinations based on those, but these are not strong indicators of the propensity of an event to occur.
Bank deposit ratings are a lot more timely and concrete. Treasurers can actually set parameters against them as they look to allocate and build out their share of the wallet. Deposit ratings provide you with another data point, outside of the standard credit ratings, to help you determine what your allocation should be to a certain bank in terms of deposits. They can also help make you more objective when choosing banking partners.
Once you begin taking note of your banks’ deposit ratings, you need to be proactive. If you notice any irregularities, you should discuss them with your bank relationship managers. Ask them, “Why is your deposit rating going up or down? Why is the outlook what it is? Are there any concerns on the horizon?’
Make sure you get an answer that puts your concerns at ease.