Could you withstand extreme levels of stress?
That's the question ratings agencies ask when they're deciding whether to award their highest Triple A status to a business.
An extreme level of stress is a rather clinical way of describing economic mayhem. The ratings agency Standard and Poor's say that for stress to be extreme, it should be something along the lines of World War II in France or the Great Depression in the US.
The Great Depression in the US was a cataclysmic event and the economy all but collapsed. House building fell by 80%, industrial production fell by nearly 50%, unemployment ran at 25% and another 25% of workers took wage cuts or worked part time. The stock market lost nearly 90% of its value and there was an ecological disaster that wiped out thousands of farms and businesses.
Standard and Poor's reckons that if a company can withstand an event as tumultuous as the Great Depression and still meet its financial obligations, then its Triple A material.
A rating is a credit score of sorts. If a business needs to borrow money, the rating can help to determine how much it will be charged. The lower the rating, the more expensive it is to borrow. It also helps investors determine the safety of an investment.
In Ireland we've been hearing a lot about ratings recently. A number of Irish banks have been downgraded and the overall banking system is now considered to be on a par with that of the Czech Republic and Slovakia.
Ratings change all the time and for a number of reasons, but we're beginning to see the effect of the recent downgrades in Ireland now. Because it's more expensive for some Irish banks to service their debt, they tend to pass that on to their customers in the form of higher loan and mortgage rates. As we've seen in the last few weeks, some banks have already increased interest rates.
The recent Irish ratings changes got me thinking and I wondered how the Irish banks stacked up. I've gone to Standard and Poor's and pulled the ratings for all the banks trading in Ireland which are listed below.
Ratings for banks trading in Ireland - S&P January 2010
|Ulster Bank Ireland Ltd||A|
|Allied Irish Bank||A-|
|Bank of Ireland||A-|
|Northern Rock PLC||A-|
|Irish Life and Permanent*||BBB+|
|Anglo Irish Bank||BBB|
* Rating from June 2009
Standard and Poor's didn't have ratings listed for Irish Nationwide, Nationwide UK, National Irish Bank and EBS. This has no reflection on their ability to meet their obligations; it generally just means that they are not publicly traded.
Rabobank is the only Triple A rated bank trading in Ireland and they proudly trumpet this fact in their advertising and literature. They have also been voted the World's Safest Private Bank. And safety is their primary selling point.
But what about our own banks? The big two currently score an A minus with S&P. It means that they should be able to survive a 'substantial level of stress' and still meet their obligations.
S&P say that substantial stress is unemployment of about 15%, a stock market drop of about 60% and a GDP drop of 6%.
One thing that this doesn't really take into account though is the safety of Irish deposits. Ireland has a 100% unlimited deposit guarantee which will run until September when it's expected to still cover €100,000 per account. This means that although Rabo is AAA, your money's still in safe hands at home.
To put all this in perspective, I've put the entire list of ratings in order below.
Standard and Poors order of ratings
CCC to C
And finally, if you'd like to see the actual definitions, they are available from Standard and Poors