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Moody's Changes Rating Methodology

Moody's Investors Service has tweaked the way it devises its financial strength rating to gauge if banks will need a bailout. 
   
The bank financial strength rating — which assesses the probability that an institution will need external help — now puts more emphasis on capital, earnings, and projected losses tied to risky assets, the agency said in a report issued this month.

David Fanger, a Moody's senior vice president, said it now takes into account multiple forward-looking scenarios, including projected earnings or losses net of dividends over 12 to 18 months.

The agency previously relied on shorter forecasts to determine financial strength, he said.
The report said the strength rating was due for an adjustment, because of the "sobering realization that the market turmoil is deeper and more enduring than was anticipated only months ago, and because of the increased dependence of banks on government support."

Fanger said that Moody's has been using the new criteria for months, and that it has figured into financial strength downgrades for Citigroup, Royal Bank of Scotland Group, and Integra Bank. Moody's has not changed the methodology for bank deposit and long-term credit ratings, he said.
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