S&P Cuts German, Austrian Banks on Mandatory Bond Losses

Deutsche Bank AG, Commerzbank AG, Erste Group Bank AG and other German and Austrian banks had their ratings cut by Standard & Poor’s on the prospect that governments are less likely to provide aid in a crisis.

Deutsche Bank’s long-term rating was reduced by two levels to BBB+ from A, with a stable outlook, as S&P considers government support to be uncertain under new German bank resolution legislation, the ratings company said in a statement on Tuesday. Commerzbank was cut by one level to BBB+ from A-.

The U.K. bank operating companies of Barclays Plc and of Royal Bank of Scotland Group Plc also had the long-term ratings reduced, while their holding companies’ ratings were left at the level to which they had been cut in February, S&P said.

“We now consider the prospect that the U.K. and German governments would provide extraordinary support to their banking systems to be uncertain, meaning that we now include no such uplift in the ratings on systemic commercial banking groups domiciled in these countries,” S&P said. “We have taken similar rating actions on certain Austrian banks.”

The European Union enacted the bank-resolution law last year in a bid to end taxpayer bailouts that prevailed in the financial crisis. The bloc provided 661 billion euros ($745 billion) for recapitalization and asset-relief measures from 2008 to 2013, according to European Commission data.

Early Adopter

Under the new rules, authorities will, as a general rule, require 8 percent of a struggling bank’s liabilities to be wiped out before recourse can be made to industry funds or taxpayer support. Member states have until Jan. 1 to apply all rules. Austria, Germany and the U.K. introduced powers a year earlier than required to force losses on bondholders.

Austria’s Erste Group was cut to BBB+ from A- and Raiffeisen Bank International AG was reduced to BBB from A-, with both having a negative outlook. In addition to the reduced likelihood of state support, S&P said competition among Austrian banks was developing into a financial stability issue.

“Significant overcapacity in Austrian banks’ domestic operations results in very low earnings and, in our view, may threaten the stability of the Austrian banking system,” it said in the statement.

S&P’s credit ratings assign a default probability that combines a bank’s stand-alone strength with the likelihood that it will get support from the state or from other sources in times of crisis. The ratings company in most cases reduced the uplift from state support entirely. Moody’s Investors Service and Fitch Ratings have a similar debt-rating structure.

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