AFP's Hunt on Deposit Ratings
Tom Hunt, Director of Treasury Services at the Association for Financial Professionals blogged recently on "Deposit Ratings: Why Treasurers Need to Use Them." He writes, "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." Hunt explains, "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.... 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."
