Risk & Compliance

For Banks, Better-run Means Better-rated

Governance practices clearly have a big impact on credit ratings and outlooks, according to Moody's Investors Service.
Stephen TaubAugust 17, 2005

Experts may still be debating whether good corporate governance results in higher stock prices. At least for banks, however, governance practices clearly have a big impact on credit ratings and outlooks, according a review of 27 major U.S. financial institutions by Moody’s Investors Service.

That impact has been felt principally after the disclosure of control failures, either leading to downward movements or creating constraints on future uplifts, according to Moody’s senior vice president Mark Watson, an author of the report. The most recent examples: Citigroup, Doral, Fifth Third, Riggs, and SunTrust.

Conversely, companies that improved their governance — either through initiatives at the bank itself or after a kick-start from regulatory action — were the beneficiaries of positive rating actions, according to the report. In the report, Watson also pointed out that sometimes, improvements helped convince Moody’s to sustain current rating levels in the expectation that governance would improve.

Moody’s noted that governance practices contributed to Wells Fargo Bank’s upgrade to Aaa in 2003, as well as Sovereign Bancorp’s change in outlook to positive from stable in 2005.

“In all cases, failures of corporate governance in U.S. banks have led to rating committee discussions — often with a focus on short-term financial impacts, like fines or litigation costs, and the potential for long-term consequences, such as damage to the bank’s reputation or its relations with regulators,” Watson said in the report.

The report also noted that many bank boards are too large; they average 15 members, compared with 11 at other U.S. companies.

The banking industry’s massive consolidation over the past two decades or so has also created oversight challenges, added the report. Bank mergers and acquisitions have loaded new organizational and operational complexities on board members at a time when they are already under increased pressure to be more diligent in their roles, Moody’s added.