Since 21 July 2018, banks with head offices in Germany have been able to issue two classes of unsecured debt instruments in terms of liability ranking, based on a revised version of section 46f of the German Banking Act (Kreditwesengesetz - KWG). The background to this is the political goal of creating a clearly defined amount of total liable funds with the non-preferred senior unsecured debt securities (or at Moody’s junior senior), as part of an EU-wide harmonisation of bail-in rules.
Moody’s has now taken this differentiation into account in the ratings of unsecured bonds at German banks (see annex in the download box for a detailed explanation). Compared to BayernLB’s previous A1 rating for unsecured debt instruments, the category of non-preferred unsecured bonds drops a notch to A2 due to the lack of government support, according to Moody’s methodology. In contrast, the new category of preferred senior unsecured (or at Moody’s senior) bonds is being raised a notch to Aa3. Government support, which continues to be taken into account, plays a role here, but it is also uplifted by the beneficial structure of the BayernLB’s liabilities side from Moody’s LGF analysis.
Conclusion: The rating action by Moody’s impacts the entire German banking landscape and is a reaction to the political requirements that bank creditors and no longer the taxpayer should be liable for risks. With an issuer rating of Aa3, which is based on the rating for preferred senior unsecured debt instruments, BayernLB has an excellent credit standing. At the same time, a rating of A2 for non-preferred senior unsecured debt instruments remains very good in relation to the European benchmark.