Finadium: Impact of Moody's Downgrades on Securities Lending, Repo and Collateral Management

Finadium released a research note this morning summarizing the Moody’s downgrades on major financial institutions and presenting several expected outcomes for the securities lending, repo and collateral management industries.

On Thursday June 21, 2012, Moody’s Investor Services released revised ratings on 15 major international banks. The long-term ratings on both bank holding companies and operating companies were reduced and short-term ratings were either reduced or stayed the same. In its eight page research note, Finadium reviewed what happened and what the expected impacts will be for securities lending, repo and collateral management.

The release was part of Moody’s scheduled review of the banks in question that had been announced on February 15, 2012. The reviews were supposed to have been concluded earlier but JPMorgan’s trading loss caused a delay. Already, bank CEOs were concerned about the timing, citing the delay as a long period to manage uncertainty from the rating’s agency, and since the release many CEOs have been displeased with the results. Moody’s was clear in its decisions however. According to the Moody’s press release:

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities”, says Moody’s Global Banking Managing Director Greg Bauer. “However, they also engage in other, often market leading business activities that are central to Moody’s assessment of their credit profiles. These activities can provide important ‘shock absorbers’ that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges.”

The downgrades represent a mix of challenges and moderate concerns for securities lending, collateral management and repo, some more demanding than others. The Finadium note presents several expected outcomes and discusses the potential repercussions for central counterparties (CCPs).

For more information and for Finadium research subscribers to access the report, please visit the Finadium website.

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