Banking industry's pecking order

Now that the dust is settling a bit, it's clear that the relative positions of the big banks---the top 15 with global capital market operations--has remained largely intact following recent Moody's credit evaulations.

There was no outright loser, and no outright winner. Median rating of the senior long-term ratings of the main operating entities of the banks is now A2, compared with Aa3 before the rating action. So the whole group has been taken down by about 2 notches. Moody's divides this group of influential banks into three groups.

• The top tier includes just three banks, only one of which is U.S.-based: HSBC, Royal Bank of Canada and JPMorgan. "These institutions have stronger buffers, or 'shock absorbers,' than many of their peers in the form of earnings from other, generally more stable businesses. This, combined with their risk management through the financial crisis, has resulted in lower earnings volatility. Capital and structural liquidity are sound for this group, and their direct exposure to stressed European sovereigns and financial institutions is contained."

• The second tier comprises Barclays, BNP Paribas, Credit Agricole SA (CASA), Credit Suisse, Deutsche Bank, Goldman Sachs, Societe Generale and UBS. "Barclays, BNP Paribas and Groupe Credit Agricole have, to varying degrees, relatively robust shock absorbers. Exposure to capital markets businesses is very high for Goldman Sachs, but this is balanced by a record of effective risk management. UBS experienced a high degree of earnings volatility, but has reduced its ambition in capital markets and continues to enhance its risk management."

• The third tier comprises Royal Bank of Scotland, Morgan Stanley, Citigroup, and Bank of America. "The capital markets franchises of many of these firms have been affected by problems in risk management, or have a history of high volatility, while their shock absorbers are in some cases thinner or less reliable than those of their higher-rated peers. Most of the firms in this group have undertaken considerable changes to their risk management or business models, as required to limit the risks from capital markets activities. Some are implementing business strategy changes intended to increase earnings from more stable activities, and liquidity and capital positions have consequently improved. These transformations are ongoing, and their success has yet to be tested."

For more:
- here's the report

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