European States’ Actions Provide De-risking for Large European Banks

Heads of state of the eurozone and the UK have announced unequivocal commitments to support their banks, which will collectively help to restore financial flows within the banking system, according to Moody’s Investors Service. “With these announcements, Moody’s considers that a substantial de-risking of the banking system is being achieved by providing significant capital and transferring banks’ credit risk to their supporting governments for the period necessary to restore confidence and normal financial market operations,” said Detlef Scholz, senior managing director at Moody’s. With implementation of this very clear systemic support, Moody’s expects that bank debt and deposit ratings of large European banks will stabilise; capital and liquidity support, which was previously at issue, is now being secured. At the same time, Moody’s does not expect widespread ratings upgrades. The exception will be for obligations of banks for which there is clear substitution of risk by the government for that of the bank, as in the case of explicit guarantees.


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