×

TEXT-S&P publishes credit FAQ on rating FI subs above bank parents

(The following statement was released by the rating agency)

Oct 10 - Within our rated universe of banking groups, it is highly unusual for a financial institution (FI) subsidiary to be rated above its parent operating company. According to a Credit FAQ titled "Rating A Financial Institution Subsidiary Above Its Bank Parent," published earlier today on RatingsDirect, this is because there are often strong business and financial links between subsidiaries and the wider group that go beyond simple ownership.

Even when this is not the case, a subsidiary could well be vulnerable to a degree of franchise contagion from credit issues elsewhere in its group, the parent could use its ownership to influence the financial position of the subsidiary, or, ultimately, the subsidiary could potentially be drawn into the insolvency of the parent. At any rate, a weak parent is unlikely to provide support to the extent that a strong one could. For these reasons, when Standard & Poor's Ratings Services downgrades a parent, it often downgrades the most highly rated subsidiaries as well.

Such downgrades are not automatic, though. Rather, any rating action on an FI subsidiary involves a comprehensive analysis of the specific situation, and the parent/subsidiary rating relationship can diverge under various circumstances. The criteria that describe this analysis are detailed in "Group Rating Methodology And Assumptions," and "Banks: Rating Methodology And Assumptions," both published on Nov. 9, 2011.

The number of subsidiaries rated above their bank parents, though low today, is gradually rising. This is because of a combination of weakening parental creditworthiness and host-country regulatory initiatives to protect pools of capital and liquidity in domestic subsidiaries (and potentially branches) of foreign banks. This article discusses the types of situations where a subsidiary can be rated higher than its parent operating entity.

Related Criteria & Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Group Rating Methodology And Assumptions, Nov. 9, 2011 -- Bank Capital Methodology And Assumptions, Dec. 16, 2010

-- Guarantee Default: Assessing The Impact On The Guarantor's Issuer Credit Rating, May, 11, 2012

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- Analytical Approach To Assessing Nonoperating Holding Companies, March 17, 2009

((Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))