Moody’s revised its methodology today (Monday) to use a new Counterparty Risk (CR) assessment as the reference point for covered bond anchors, a move it said will generally have a positive rating impact on covered bonds.

The introduction of CR assessments was confirmed today in a wider update of Moody’s bank rating methodology, and followed request for comment periods regarding its introduction in both bank and covered bond ratings.

Under previous changes implemented from March 2014 to take into account bail-in frameworks Moody’s used senior unsecured ratings (SURs) or Adjusted Baseline Credit Assessments (BCAs) as the reference point for covered bond anchors, which were up to one notch higher than the SUR or up to two notches higher than the BCA.

CR assessments will take over as the reference point for covered bond anchors, which reflect the probability that an issuer will cease making payments under its covered bonds before any recourse to the cover pool – a covered bond anchor event.

“The covered bond anchor will be the CR Assessment plus one notch for covered bonds that fall under either (1) the EU directive on bank resolution and recovery, or (2) a resolution regime that Moody’s believes provides an equivalent level of protection for covered bonds,” it said. “Otherwise the covered bond anchor will typically be the CR Assessment.”

In a response to frequently asked questions regarding its bank rating methodology, Moody’s said that the position of the CR assessment will in all cases be no lower than the Adjusted BCA, which is the BCA plus any notching for affiliate support. It said the exact position relative to rated instruments will depend on the presence and type of operational resolution regime, stating (in its words):

- In the EU, Norway and Liechtenstein, the CR Assessment will generally be at least as high as the deposit rating.

- For US banks subject to Title II resolution, the CR Assessment will generally be at least as high as the senior unsecured debt rating.

- In Switzerland, the CR Assessment will generally be at least as high as the senior unsecured debt rating. For US banks subject to Title I resolution, the CR Assessment will generally be one notch higher than the bank’s Adjusted BCA.

- Outside operational resolution regimes, the CR Assessment will also generally be no lower than the deposit rating.

Moody’s said that in all cases the CR assessment is subject to a cap of the lower of the local currency deposit ceiling or the local government bond rating plus one notch, or plus two notches where the Adjusted BCA itself is already above the government bond rating.

The rating agency expects to conclude the majority of the covered bond rating reviews in the first half of the year.