Posted Date : 14 Aug 2013

MARC has today released its rating approach for Basel III-compliant Additional Tier 1 and Tier 2 capital instruments. The approach outlines the general notching guidelines that MARC will apply to issues of Basel III-compliant bank capital instruments.

MARC’s general approach to rating various classes of debt and hybrid securities issued by a financial institution is to notch down from the issuer’s Financial Institution (FI) rating. In general, notching narrows at higher rating levels and widens at the lower end of the rating scale to reflect higher potential loss severity for lower rated banks in the event of a winding-up scenario. In cases where the FI rating has benefited from meaningful rating uplift on account of systemic external support, the notching from the FI rating could be wider than that indicated by our notching guidelines. The FI rating incorporates explicit or implicit external support for the financial institution in the form of institutional support from the financial institution’s shareholder(s) and systemic external support where the institution is assessed to be systemically important.

MARC’s notching guidelines for rating Basel III-compliant capital instruments are as follows:-

  Notching down from FI rating
Instrument FI rating of AA to AAA FI rating of A to AA- FI rating of A- or lower
Additional Tier 1 capital instruments Three notches down from FI rating Four notches down from FI rating Five notches down from FI rating
Tier 2 capital instruments One notch down from FI rating Two notches down from FI rating Three notches down from FI rating

MARC’s notching guidelines reflect the lower recovery prospects and higher risks of write-off or enforced conversion of capital instruments for Basel III-compliant capital instruments as compared to their Basel II predecessors, particularly for banks rated lower on financial strength. A major new requirement for Basel III compliant Additional Tier 1 and Tier 2 capital instruments is that they must contain provisions to ensure that losses are fully absorbed by the instruments at the point of non-viability. The wider notching that will be implemented for Basel III-compliant Additional Tier 1 capital instruments also incorporates full discretion on the part of banks, at all times, to cancel distributions without giving rise to an event of default. In the case of Tier 2 capital instruments, MARC has introduced additional notching for instruments rated A- and below relative to their Basel II predecessors to reflect their higher expected severity of loss given default.

MARC’s detailed methodology can be found in a paper entitled :

Contacts: Milly Leong, +603-2082 2288/ milly@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.