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Criteria | Financial Institutions | Request for Comment:

Methodology For DeterminingBanking Industry Country RiskAssessmentsPrimary Credit Analysts:Scott Bugie, Paris (33)1-4420-6680; [email protected] Lundberg, Stockholm (46) 8-440-5938; [email protected]

Secondary Credit Analysts:Ritesh Maheshwari, Singapore (65) 6239-6308; [email protected] De Toytot, Paris (33) 1-4420-6692; [email protected]

Global Financial Institutions:Hans Wright, Criteria Officer, London (44) 20 7176 7015; [email protected]

EMEA Financial Institutions:Michelle Brennan, Criteria Officer, London (44) 20-7176-7205; [email protected]

Asia-Pacific:Terry Chan, Criteria Officer, Melbourne (61) 3-9631-2174; [email protected]

Global Sovereigns:Marie Cavanaugh, Criteria Officer, New York (1) 212-438-7343; [email protected]

Table Of Contents

PROPOSAL SUMMARY

IMPACT ON OUTSTANDING RATINGS

RESPONSE DEADLINE

METHODOLOGY

Assessment And Scoring

1. Country Risk

A. Economic Stability And Resilience

B. Economic Imbalances

May 13, 2010

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Table Of Contents (cont.)

C. Credit Risk In The Economy

2. Industry Risk

D. Institutional FrameworkE. Competitive Dynamics

F. Systemwide Funding

3. Gross Problematic Assets

4. Related Research And Criteria

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Criteria | Financial Institutions | Request for Comment:

Methodology For Determining BankingIndustry Country Risk Assessments

1. Standard & Poor's Ratings Services is requesting comments on its proposed changes to its methodology fordetermining Banking Industry Country Risk Assessments (BICRAs).

2. If adopted, these proposed criteria would supersede "Methodology: Banking Industry Country Risk Assessments,"published June 6, 2006.

3. This article is related to our criteria article "Principles Of Corporate And Government Ratings," which we publishedon June 26, 2007.

PROPOSAL SUMMARY4. Over the past three years, the global banking industry has experienced turbulence and decline, marked by high losses

and bouts of illiquidity in funding. We have seen unprecedented government intervention to support severaltroubled financial conglomerates in leading market economies such as the U.S. and the U.K. The depth of thedownturn in the financial sector, particularly in the U.S. and Europe, has had repercussions for the broadereconomy. As a result, Standard & Poor's, like other market participants, is reevaluating the effects of innovationand developments in the banking industry and their implications for creditworthiness. In this regard, we areanalyzing, in particular, the role of financial institutions in fueling credit-backed asset bubbles, such as in residentialreal estate, and the influence of the "shadow banking system," or sizable parts of a banking industry or industriesthat operate out of the view of regulators.

5. As part of this effort, Standard & Poor's is requesting market comments on proposed changes to its methodologyfor determining Banking Industry Country Risk Assessments (BICRAs). A BICRA is our evaluation of the economicand industrywide risk profile of a country's financial system. The BICRA reflects the general creditworthiness of acountry's banking industry. We use the BICRA methodology to determine our view of the relative level of risk of acountry's banking industry on a global basis. A BICRA signals the systemwide risk of operating in a bankingindustry for an individual financial institution. We assess that risk on a scale from 1 to 10, ranging from thelowest-risk banking industries (group 1) to the highest-risk (group 10).

6. These criteria would be applicable to the 92 countries to which we currently assign a BICRA. For the most recentlist of our BICRAs, see "Banking Industry Country Risk Assessments."

7. This proposal spells out the "factors" we analyze to come up with assessments of "country risk" and "industryrisk," the two key components of our BICRA methodology. In addition, we propose ways to make the methodologymore forward-looking, such as greater emphasis on:

Economic imbalances--such as excessive credit growth, asset price bubbles, and large current account deficits--inour assessment of country risk;

A banking industry's risk appetite, products and practices, and funding; and Factors that we assess as high risk, by giving them more weight in the assignment of a BICRA group.


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8. We are also proposing more formal guidelines for assessing and scoring the factors to enhance comparability andtransparency, and a change in the name to country risk from the previous term "economic risk."

IMPACT ON OUTSTANDING RATINGS9. We expect that the changes we propose to the BICRA methodology will result in changes to BICRA groups and that

the BICRA groups may change more frequently than in the past. We propose to report more quickly than in the paston changes to BICRA groups and to follow up with a report about the banking industry that fully explains ouranalysis.

10. We expect minimal changes in our issuer credit ratings (ICRs) for financial institutions as a direct result of adoptionof the proposed BICRA criteria. But adoption will have indirect implications for our ratings on financial institutionsand possibly more significant implications in the future.

11. Under our existing criteria for rating financial institutions, the BICRA is a guideline for the highest unsupportedrating on a bank, what we call a "stand-alone credit profile." Consequently, a BICRA change does not

automatically lead to a change in the ICR on a financial institution domiciled in the country.12. However, as part of our current review of criteria for financial institutions--banks, finance companies, and

institutional brokers--Standard & Poor's expects to place much greater importance on the BICRA (see "AdvanceNotice Of Proposed Criteria Change: Banks, Finance Companies, And Institutional Brokers," published March 11,2010).

13. It should be noted that we use the country risk score and the BICRA group to calculate our capital ratios,specifically in calculating risk-weighted assets under our risk-adjusted capital framework (RACF) (see"Methodology And Assumptions: Risk-Adjusted Capital Framework For Financial Institutions," published April 21,2009).

RESPONSE DEADLINE14. We encourage all market participants to submit written comments only on the proposed criteria by July 15, 2010.

However, we will continue to accept feedback as we gather comments on the bank criteria. We will announce thedeadline for comments on those Requests for Comment when they are published. Please send your writtencomments to [email protected]. Once the comment period is over, we will review thecomments and publish the updated criteria.

METHODOLOGY15. The BICRA methodology comprises two main areas of analysis: "country risk" and "industry risk." These areas are

distinct but interrelated. Country risk refers to specific "characteristics" or features of an economy that affectbanking risk. Industry risk refers to specific characteristics of the banking system of a country such as regulation,competition, and funding. We analyze 19 quantitative and qualitative "characteristics" grouped into six "factors" tocome to our opinions about country risk, industry risk, and a BICRA (see box 1).


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Assessment And Scoring16. We assess each factor on a scale that ranges from "very low risk" to "extremely high risk," based on an analysis of

its characteristics and associated metrics (see tables 4-9 below). We determine their importance for that industry andin comparison with those for peer banking systems. We do not average our assessments on characteristics todetermine our score for a factor. Instead, one or two characteristics may dominate and shape our opinion about afactor's riskiness. "Intermediate risk" represents our view of median risk across all of the world's banking industries.

"Extremely high risk" would apply in rare circumstances and signal serious deficiencies or stress.

17. The metrics draw on a number of measures and our own qualitative judgment. We use national statistics, aggregatestatistics that a banking industry and its regulators produce, as well as our own data and information about thatbanking industry. We assess the importance of the level and trend of the metric in that banking industry andcomparatively with its performance in other banking industries.

18. The risk scale represents our twofold approach to measuring risk. We assess the riskiness of a factor relative to its


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riskiness in other banking systems. In addition, we determine our view of the factor's absolute importance andinterplay with other factors to influence the risk of a specific banking industry. We use this two-fold approachbecause data across financial systems are inconsistent and sometimes unreliable, and because each country may be ina different stage of development or economic cycle.

19. To arrive at country and economic risk scores, and the BICRA, we associate points to each factor, using aprogressive scale, weighting "high risk," "very high risk," and "extremely high risk" more heavily by assigning agreater number of points to them (see table 1). We have intentionally created the scale this way so that if we assessone factor as "very high risk," it could lead to a higher BICRA group--even if we determine that the five otherfactors are "low risk."

Table 1

How We Score Each Of The Six Main BICRA Factors

Relative Risk Description PointsVery low risk 1

Low risk 2

Intermediate risk 3High risk 5

Very high risk 7

Extremely high risk 10Source: Standard & Poor's.

20. To score country risk, we add the points for the three factors "economic stability and resilience," "economicimbalances," and "credit risk in the economy," and assign a number on a 1-10 scale, with 1 representing the lowestand 10 representing the highest country risk (see table 2). Likewise, to score industry risk, we add the points for itsthree factors, "institutional framework," "competitive dynamics," and "systemwide funding," and associate anumber on the 1-10 scale, with 1 representing the lowest and 10 representing the highest industry risk. It is unlikely

that all of our factors or characteristics for a banking industry will fall into a single risk description.Table 2

How We Assign Country And Industry Risk Scores

Points total for the three country or industry risk factors Country or industry risk score (On 1-10 scale, from lowest to highest risk)3-4 1

5-6 2

7-8 3

9-10 4

11-12 5

13-14 6

15-16 717-18 8

19-22 9

23-30 10

Source: Standard & Poor's.

21. To determine the BICRA for the country, we add the points for all six factors and assign a group on the 1-10 riskscale (see table 3).


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Table 3

How We Assign A BICRA Group

Points total for the six factors BICRA (on a 1-10 scale, from lowest to highest risk)6-8 1

9-12 2

13-16 317-20 4

21-24 5

25-28 6

29-32 7

33-36 8

37-44 9

45-60 10Source: Standard & Poor's.

22. Our BICRA analysis considers the influence of government supervision and regulation of the banking system,

including potential emergency systemwide support programs, but excludes the potential for targeted governmentintervention and rescue of specific financial institutions.

1. Country Risk23. Our assessment of the country risk of a banking industry takes into account our view of the stability and structure

of an economy, along with its economic policy flexibility, actual or potential imbalances, as well as the credit risk of economic participants--mainly households and enterprises. In the BICRA criteria, the factors economic stability andresilience, economic imbalances, and credit risk in the economy represent our views in these areas. In other words,we are looking for the potential for adverse economic developments and the country and banking system's capacity

to adjust to those developments, economic trends, and factors that may lead to problems with banks' borrowers andcustomers.

A. Economic Stability And Resilience24. We assess economic stability and resilience by looking at three characteristics, "economic stability," "economic

structure," and "economic policy flexibility" (see table 4 at the end of this section). In our view, economic stabilitysets the stage for healthy business conditions. Resilience is a gauge of the economic structure in the country as wellas the potential for fiscal and monetary policies to mitigate adverse economic developments. We associate a stableand resilient economy with low country risk and a volatile and inelastic economy with high country risk.

Economic stability25. We define economic stability as our view of the potential future volatility of economic growth, based on a country's

track record and our opinion of its capacity to cope with shocks or significant changes in circumstances. Ouranalysis of sovereign creditworthiness largely governs our assessment of this characteristic. We assess economicstability by analyzing the following "elements": a country's economic growth, inflation, real interest rates, exchangerate policy, and political environment.

26. We associate stable past and projected real GDP growth and low and stable inflation with low country risk. On the


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other hand, we associate high and volatile real GDP growth and inflation with higher country risk. We believe thatdeflation, a less frequent phenomenon, can also heighten risk.

27. We associate real interest rates that counterbalance the expansion and contraction phases of a business cycle andreduce its peaks and troughs with lower country risk. In a banking industry, such conditions facilitate better riskpricing--that is, prices that appropriately factor in the cost of future losses. Conversely, we believe that prolongedperiods of low or negative real interest rates may lead to credit booms and consequently growing economicimbalances, which we associate with higher country risk.

28. As for monetary and exchange rate policy, we assess the credibility of a country's fixed exchange rate regime orexchange rate volatility under a flexible exchange rate regime. We associate stable exchange rates with lowercountry risk, and higher exchange rate volatility with foreign exchange rate risk. However, we believe that a floatingexchange rate can represent less risk to a banking system than a fixed one because it allows for adjustments inresponse to economic pressures.

29. We analyze the political environment because we believe that political and economic risks are tightly linked. Highpolitical risks in our view engender high economic risk and vice versa. In cases where political risk significantlydiffers from economic risk, however, we weigh the political environment more strongly in our assessment of economic stability.

Economic structure30. To assess economic structure, we look at these elements: a country's wealth, diversity, market orientation, and

resilience. We believe that a highly diversified economy, based on a large number of manufacturing and servicessectors and highly market-oriented, has a larger capacity and greater adaptability to withstand economic shocks,and we associate that with lower country risk. Conversely, we believe that a country with an economy that isdependent on a few sectors, notably agriculture or other primary commodities, and that has weak marketorientation tends to be more volatile and vulnerable to significant changes in external demand, which we associate

with higher country risk.Economic policy flexibility

31. To analyze economic policy flexibility, we look at these elements: a government's finances, our foreign currencyrating on the sovereign, and a country's monetary policy. The effectiveness of a country's economic policyframework in achieving economic and monetary stability usually results in either relatively stable or volatileeconomic conditions. In our view, the sounder a government's finances, the greater its flexibility to adjust theeconomy to the economic cycle--particularly in a recession.

32. We believe that the role a local currency may play in global markets and especially as an international reservecurrency could enhance monetary flexibility.

33. The importance of flexible economic policies was demonstrated very clearly during the 2008-2009 liquidity crunchand global recession, when governments and central banks across the globe provided fiscal, monetary, and liquiditysupport to the critical participants of their capital markets, reducing short-term pressure on the economy andbanking sector.

34. We take into account our sovereign credit rating on the country because the creditworthiness of the banking systemand its sovereign government are closely related. Typically, when the creditworthiness of a sovereign governmentsignificantly deteriorates, the domestic banks face problems in funding and asset quality as well. An increase in


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38. Real estate. The performance of the residential and commercial real estate market in our view has a large effect onrisk in the banking system. We assess "real estate" by monitoring inflation-adjusted prices for property in theresidential and commercial markets.

39. This sector typically accounts for most household debt (in the form of mortgage loans) and much corporate debt (inthe form of construction loans and investment loans). Plus, residential and commercial real estate is the mostcommon type of collateral for household and corporate borrowing.

40. We particularly look at the real estate development industry. This sector takes many years from project developmentto final sale and, for that reason, is prone to overbuilding and swings in prices, which affect economic conditionsand are affected by them. Uncompleted and unoccupied properties lose value quickly in a downturn and mayweaken a bank's loan portfolio and induce a broader economic downturn. Many countries' economies experiencepronounced cycles in real estate prices.

41. Equities. Stock market cycles also affect banking industry risk--although in our view not as much as real estatecycles. A sharp drop in share prices reduces the value of financial institutions' shareholdings and reduces the wealthof bank customers. We associate an equity market featuring pronounced peaks and troughs in prices with higher

country risk than a market with less volatile equity prices. A banking industry can become sensitive to fluctuationsin equity prices if it holds a large number of shares for use as collateral or engages in margin lending to a significantextent.

Current account and external position42. We look at a country's current account and external debt position as indicators of mounting imbalances. We

especially look at deteriorating current account deficits because they indicate an increasing dependence on externalfinancing. Some types of external financing are less risky than others. Foreign direct investment (FDI) tends to bemore stable and longer term than lending or shareholdings by foreign creditors, which are subject to investorappetite. If current account imbalances unwind rapidly, they may push the economy into a hard landing.

43. In the extreme, a huge external debt and skyrocketing cost of external funding can lead to capital flight. Trends thatcan increase that cost include: sizable economic imbalances, real or perceived pressure to devalue the local currency,weak or declining economic growth prospects, and political uncertainty. However, we believe that a sovereign withvery high creditworthiness or whose local currency is an international reserve currency may face fewer adverseeffects from high reliance on external debt.

44. We analyze the use of cross-border borrowings. We believe that a banking industry that uses the borrowings tofinance domestic consumption is riskier than one that uses them to finance investments that will generate futurerevenues to service the debts.

45. We associate unsustainable current account deficits and a high reliance on more volatile external funding sourceswith high country risk. Conversely, sustained current account surpluses, accompanied by stable or declining external

debt in our view indicate lower country risk.

Credit growth46. We watch for signs of a credit boom--excessive growth in credit, which we define as exceeding economic growth

over several years. A credit boom increases the potential for a credit bust--a disorderly period of debt reduction thatmay include loan restructuring, nonpayment, and defaults--resulting in high loan losses for banks. The combinationof a credit boom and a rise in real estate or other asset prices often builds a speculative asset bubble that may burstat a later stage. We associate a rapid expansion in private-sector debt with high country risk.


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Table 5

Economic Imbalances: Characteristics, Elements, And Metrics For Assessing Banking Industry Country Risk

--Risk scale*--

Very low risk Intermediate risk Very high risk

Characteristics --Elements and metrics--Asset prices Very limited (less than 3% average

annual) rise in real house pricesover past four years. Limited risein real equity prices over past twoyears (under 10% average annualgrowth).

Moderate (between 6% and 10% averageannual) rise in real house prices over pastfour years. Significant rise in real equityprices over past two years (between 20%and 30% average annual growth) orequity bubble has burst with limitedimpact on banks.

Significant (between 15% and 20%average annual) rise in real house pricesover past four years or a housing bubblehas burst with significant impact on banks.Excessive rise in real equity prices overpast two years (between 50% and 75%average annual growth) or equity bubblehas burst with significant impact on banks.

Current account andexternal position

Balance favorable (surplus or lessthan negative 1% of GDP onaverage) over past four years andprojected to remain so. No or lowdependence on external funding(net external debt is less than 10%of current account receipts).

Moderate deficit over past four years(3%-5% of GDP on average) and projectedto remain so. Moderate dependence onexternal funding (net external debtbetween 30%-50% of current accountreceipts) for sovereigns that we ratebelow 'A-'. Moderate risk of sudden

capital outflows.

Repeated high deficits over past four years(8%-10% of GDP on average). Very highdependence on external funding (netexternal debt between 70%-90% ofcurrent account receipts) for sovereignsthat we rate below 'A-'. High risk ofsudden capital outflows.

Credit growth Fairly stable over past four years.Annual average increase in privatesector leverage to GDP less than2%.

Moderate over past four years. Annualaverage increase in private sectorleverage credit to GDP of between 4%and 7%.

Significant over past four years. Annualaverage increase in private sector leveragecredit to GDP between 10% and 14%.

*For readability the scale shows only three of our six risk categories. Note: The metrics draw on a number of measures and our own qualitative judgment. We use nastatistics, aggregate statistics that a banking industry and its regulators produce, as well as our own data and information about that banking industry. We assess theimportance of the level and trend of the metric in that banking industry and comparatively with its performance in other banking industries. Source: Standard & Poo

C. Credit Risk In The Economy47. By assessing credit risk in the economy, we are trying to determine the lender's risk of loss if the borrower is unable

to pay its obligations. We assess this factor by analyzing these three characteristics: "lending and underwritingstandards," "payment culture," and "leverage of companies and households" (see table 6 at the end of this section).The quality and effectiveness of a banking industry's broad lending and underwriting practices, payment culture of borrowers, and the financial position of the private sector influence the severity of banking losses resulting from aneconomic downturn. Differences in these factors from country to country will likely result in higher or lower lossesfor the banking industry, particularly amid an economic downturn.

48. We focus on a banking industry's lending and underwriting standards, which refer to loans made to households andenterprises--including government-owned companies but excluding loans to other banks.

49. As an aspect of underwriting, we look at the overall use of credit and especially securitization and derivatives.Extensive use of securitization and derivatives is not a risk factor per se in our opinion. Indeed, these techniques maybalance and hedge risks in a banking industry. However, we associate high risk with a banking industry that usessecuritization and derivatives for the purpose of shifting risk off the balance sheet.

50. In certain cases, when a country's sovereign creditworthiness is weaker than that of its banking industry, we closelyassociate our assessment of credit risk for the banking industry with that of the government. We believe that thesovereign credit standing is integral to that of the banking industry and wider financial system. When the sovereignis weak the financial system is also weak, since it lends to the government and depends on the government in many


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ways. However, a more typical case for this methodology is a sovereign whose creditworthiness is stronger or asstrong as the banking industry, and in these cases, the usual BICRA factors apply.

51. As for company and household leverage, we take into account a number of indicators, including the amount of totaldebt outstanding as a share of GDP. However, we consider that institutional and cultural elements--namelyunderwriting standards, payment culture, and the relative effectiveness of the legal system--can mitigate highleverage or worsen low leverage.

Lending and underwriting standards52. To assess this characteristic, we look at loan-to-value (LTV) ratios, lending concentrations in cyclical or vulnerable

sectors, and foreign currency lending. We look at these as indicators of underwriting standards, and we may includeother information that is available and relevant to come to an opinion about this characteristic.

53. We emphasize the quality and effectiveness of a banking industry's underwriting standards and lending practicesbecause they can help or hinder its ability to face adverse economic developments. We associate a relaxation of standards and practices with higher risk and rising credit risk (see box 2).

54. In the area of lending, we consider that the most important indicators of risk are the valuation of collateral, mostoften real estate, and the proportion of the collateral's value that banks usually lend to borrowers--as expressed byLTV ratios. Information on LTV is not standardized across countries, and LTVs may be defined differently by banksin the same country. We assess and compare industrywide LTV measures, taking these differences into account.

55. We assess the banking industry's lending concentrations by economic sector, particularly for highly cyclical sectorssuch as construction, oil production, and shipping. We also look at lending in foreign currencies, a common practicein many countries, which may increase risk by exposing unhedged borrowers to a potential weakening of the localcurrency.


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Payment culture56. To assess this characteristic, we look at: the legal framework, the resolution of loan defaults and recoveries, and

adherence to the rule of law. We believe that the payment culture of a country influences the incidence of defaultand recovery in that country.

57. This culture comprises the fairness and predictability of the legal framework, including bankruptcy law and creditorrights, the creditor's ability to recover collateral, and the resolution time for bankruptcy or foreclosure.

58. These are particularly important during a recession and the ensuing restructuring. We associate economic systemsfeaturing arbitrary and discretionary judicial rulings regarding creditors with higher risk than systems that clearlyfollow a defined and well-implemented body of law. Likewise, we associate systems with a higher degree of corruption in the government and judiciary with higher country risk than systems with little corruption.


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59. Debtor-friendly legal systems that limit the recourse of lenders to the assets of borrowers--such as the U.S., withrespect to its bankruptcy laws for individuals--in our view may lead to a higher incidence of delinquency and loss inan economic downturn and correction, particularly if it follows a credit boom and inflated real estate prices. Wegenerally view such a payment culture as higher risk in our assessment of credit risk in the economy than morecreditor-friendly regimes. However, the time that it takes for a banking system to resolve bankruptcies and gain

control of collateral can offset or aggravate that risk. Speedy resolutions of bankruptcies and quick foreclosures tosale are a mitigant, while drawn-out bankruptcies and long foreclosures to sale can compound credit risk in theeconomy.

Leverage of companies and households60. To assess this characteristic, we analyze the share of private-sector debt to GDP, the financial position of companies

and households, and nonperforming assets (NPAs)--essentially loans outstanding for which borrowers are notmaking payments, restructured assets (where the original terms have been altered), foreclosed real estate and otherassets recovered in loan workouts, and NPAs sold to special-purpose vehicles, excluding loans to other banks. Bylooking at these elements, we are attempting to gauge the economic resilience of borrowers. For enterprises, westudy a number of indicators, such as past and projected trends in corporate and personal bankruptcies and credittrends derived from our own credit analyses of companies in the country in question. We assess the financialposition of households using measures such as household debt to GDP, household debt burden to disposableincome, and the level and trend of delinquencies.

61. We associate the following elements of a country's company and household debt with lower risk: stable or decliningdebt for a country's private sector, low rates of personal and corporate bankruptcies, low household debt to GDP,low household debt service to household disposable income, and low and declining delinquencies.

62. We associate the following elements of a country's company and household debt with higher risk: high andincreasing debt, low interest coverage, high and increasing rates of personal and corporate bankruptcies, highhousehold debt to GDP, a high proportion of household debt service to household disposable income, and high and

increasing delinquencies.

Table 6

Credit Risk In The Economy: Characteristics, Elements, And Metrics For Assessing Banking Industry Country Risk

--Risk scale*--


Characteristics --Elements and metrics--Lending andunderwritingstandards

Very conservative lending practices andunderwriting standards: conservativeLTV ratios in residential mortgagelending. No new mortgage lending withLTV higher than 80%. No concentration

in cyclical or vulnerable sectors. Verylimited foreign currency lending (under5% of total) or very low vulnerabilitydue to highly stable and credible peg.

Relatively conservative lending practicesand underwriting standards: moderateLTV ratios in residential mortgage lending.Mortgage lending with LTV over 80%accounts for 20%-40% of new loans.

Little concentration in cyclical orvulnerable sectors. Moderate foreigncurrency lending (10%-20% of total) ormoderate vulnerability because of stableand credible peg.

Very relaxed lending practices andunderwriting standards: aggressive LTVratios in residential mortgage lending.Mortgage lending with LTV in excess of80% account for 60%-80% of new loans.

Concentration in cyclical or vulnerablesectors. Common use of foreign currencylending (30%-50%) and very highvulnerability due to a fall in currencyvalue.

Payment culture Very effective legal framework. Legalclaims over loan defaults andrecoveries of collateral proceed veryquickly and effectively. High adherenceto the rule of law.

Moderately strong legal framework. Legalclaims over loan defaults and recoveriesof collateral usually proceed withsatisfactory speed and effectiveness, butdelays may occur. General adherence torule of law.

Ineffective legal framework and judicialsystem. Often arbitrary and discretionarylegal and judicial decisions.


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Table 6

Credit Risk In The Economy: Characteristics, Elements, And Metrics For Assessing Banking Industry Country Risk (cont.)Leverage ofcompanies andhouseholds

Low private sector debt to GDP (lessthan 80%) in mature market economies.Current and projected financial positionof companies and households verystrong over next two to three years. Ourprojections show very low NPAs (lessthan 2% of the total).

Intermediate private sector debt to GDP(120%-150%) in mature marketeconomies. Current and projectedfinancial position of companies andhouseholds moderately sound over nexttwo to three years. Our projections showmoderate NPAs (4%-6%).

Very high private sector credit to GDP(180%-220%) in mature markets. Currentand projected financial position ofcompanies and households weak andcould deteriorate significantly over nexttwo to three years. Our projections showhigh NPAs (between 10% and 15%).

*For readability the scale shows only three of our six risk categories. Note: The metrics draw on a number of measures and our own qualitative judgment. We use nastatistics, aggregate statistics that a banking industry and its regulators produce, as well as our own data and information about that banking industry. We assess theimportance of the level and trend of the metric in that banking industry and comparatively with its performance in other banking industries. LTV--loan-to-value.NPA--Nonperforming asset. Source: Standard & Poor's.

2. Industry Risk63. Our assessment of industry risk takes into account our view of the structural features of a country's banking

industry. It encompasses the quality and effectiveness of bank regulation and the track record of authorities inmanaging financial sector turmoil, the competitive environment of a country's banking industry, including the

industry's structure and performance, financial products and practices, and the role of nonbank financialinstitutions. We also assess a banking industry's relative degree of risk taking via complex products, includingfinancial derivatives. We associate aggressive use of complex products and derivatives with higher industry risk, andthe absence of complex products and derivatives with lower industry risk. Industry risk also addresses the range andstrength of funding options available to banks, including the role of the central bank and government.

64. The BICRA criteria organize our assessment of industry risk into three factors: "institutional framework,""competitive dynamics," and "systemwide funding" (see table 7 at the end of this section).

D. Institutional Framework65. We assess this factor by looking at these three characteristics: "regulatory standards and coverage," "regulatory

track record," and "governance and transparency." When analyzing the institutional framework of a bankingindustry, we look at the banking laws and regulations of a country and the track record of regulators in managingpast periods of financial distress and banking crises. We also assess systemwide corporate governance and thetransparency and quality of financial information that domestic market participants provide.

Regulatory standards and coverage66. In this area, we assess the nature of regulations and approach of regulators, and the extent of regulatory coverage.

Our aim is to come to a view about the ability of regulators to preserve financial stability through the business cycle,particularly during periods of economic decline and turbulence. To that end, we may look at the letter and spirit of acountry's banking laws and regulations, the extent of regulatory powers of control over the banking industry, thedegree to which regulatory policies foster market discipline and their effectiveness, and the balance of powerbetween regulators and industry participants. We believe that the enforcement of rules and policies is equallycritical, together with a low potential for financial institutions to "game the system" and circumvent regulatoryrestrictions.

67. The metrics for this characteristic are more qualitative than others. We recognize that regulation regarding loan lossprovisions and bank capital differs from country to country, making banking industries more or less resilient to


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changing economic circumstances. In our opinion, conservative regulatory policies include concentration limits overlending that apply to the entire banking industry; other mechanisms to counter excessive expansion of credit;prudent rules regarding underwriting (such as LTV limits); designated authority to intervene at an early stage of problems; the existence of what have been called "macroprudential" policies, that is, policies to counter potentialsystemwide and systemic risks; and high minimum capital and liquidity standards. We associate more conservative

regulatory policies with low industry risk and less conservative regulatory policies with high industry risk.

68. We assess the reach of national regulatory authorities, that is, how much regulation encompasses all types of financial institutions: holding companies, insurance companies, fund and asset managers, nonbank financialcompanies, and structured finance vehicles. We associate a regulatory framework that meaningfully captures a widerrange of financial institutions with lower industry risk. On the other hand, we associate a narrow framework thatallows unregulated competitors in the market with higher industry risk. In our view, a regulator's speed in adaptingregulation to innovation in the banking industry is also important. For industries with significant foreign operations,we review how much home and host regulators cooperate and how effective they are.

Regulatory track record

69. To assess this characteristic, we look at the proactiveness of regulatory policies and practices, the authority of banking authorities to remedy problems early on, and their track record in doing so, as well as their freedom to actwithout political influence.

70. We evaluate the track record of the authorities in managing past financial crises, but may incorporate developmentsthat we believe may alter how they handle an individual bank or an entire banking industry in distress. We look athow much demonstrated, clear, and meaningful authority financial supervisors have to remedy problems. We assessthe supervisor's freedom to act without political influence. We associate prudential and proactive regulatory policieswith lower industry risk, and lax and reactive regulatory policies with higher industry risk.

71. In our opinion there is no link between the sophistication in a banking industry and the effectiveness of its regulator

in managing the buildup of risk in advance of a crisis. This became apparent in relatively mature markets in thecrises of 2008 and 2009. However, national financial authorities in many of the more developed countries andinternational bodies such as the Basel Committee on Banking Supervision are proposing profound changes toremedy shortcomings in several areas. For this reason, in our assessment of a regulator's track record, we alsoinclude potential changes in regulatory standards and coverage.

Governance and transparency72. In this area we generally look at ownership, management, and governance, as well as financial reporting and

disclosure in a banking industry. We assess the type of ownership and establish the degree of transparency anddisclosure of accounts by examining the frequency and timeliness of reporting, the quality of financial reports, anddegree of standardization.

73. In our view, banks are vulnerable to poor governance by owners and managers and to the influence of thegovernment, both of which can lead to risky lending or investment decisions. We associate corporate governancethat is transparent, prudential, and independent from undue outside influence--namely, government-directed lendingor lending to the interests, family, or associates of the owners--with lower industry risk. In contrast, we associateopaque, imprudent governance that sets no limits on government and owner influence in lending with higherindustry risk.


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74. We take into account the balance of stakeholder interests among shareholders, managers, depositors, andborrowers. In shareholder-friendly markets, for example, in our view banks may engage in riskier, high-yieldingproducts to enhance shorter-term performance. We may also look at compensation practices and incentives todetermine whether they work to reward prudent management.

75. We examine the quality of accounting and disclosure standards, including whether a banking industry has adoptedInternational Financial Reporting Standards (IFRS). If banks still use the local GAAP (generally accepted accountingprinciples), we assess those standards. In some cases, we may also assess the extent and effectiveness of a country'sauditing requirements.

Table 7

Institutional Framework: Characteristics, Elements, And Metrics For Assessing Banking Industry Country Risk

--Risk scale*--


Characteristics --Elements and metrics--Regulatory standards

and coverage

Regulations very conservative

regarding banking practices andprudential financial standards.Regulators monitor banks veryclosely and frequently. Regulatorycoverage of financial sectorextensive.

Regulations mostly conservative regarding

banking practices and prudential financialstandards but with some less conservativefeatures. Regulators usually monitor banksclosely and frequently, but gaps couldoccur. Regulatory coverage of financialsector good, but some lapses exist. Certainparts of financial industry not regulated.

Regulations lax or absent regarding

important aspects of banking practices andfinancial standards. Significant gaps ordelays could occur in monitoring financialinstitutions. Significant lapses exist inregulatory coverage of financial sector.

Regulatory trackrecord

Policies and practices highlyproactive. Supervisors havedemonstrated authority to remedyproblems early. Very strong trackrecord of addressing early signs offinancial distress over severalcycles. Regulator mostly free frompolitical influence.

Policies and practices moderatelyproactive. Supervisors have authority toremedy problems early, but may notalways do so. Supervisors have moderatelystrong track record of identifying earlysigns of financial distress over severalcycles. Regulator moderately free frompolitical influence.

Policies and practices in certain importantareas not proactive. Supervisors lackcapacity and authority to address problemsearly in certain important areas. Poor trackrecord of identifying early signs of financialdistress. Supervisor's corrective actionsweak and insufficient. Regulator subject topolitical influence that weakens regulation.

Governance andtransparency

Very high transparency and degreeof disclosure of accounts andownership, as measured byfrequency and timeliness ofreporting, quality of financialreports, and degree ofstandardization.

Moderate transparency and degree ofdisclosure of accounts and ownership ofbanks, as measured by frequency andtimeliness of reporting, quality of financialreports, and degree of standardization.

Many aspects of ownership, managementand governance lead to risks. Poortransparency and degree of disclosure ofaccounts and ownership of banks, asmeasured by frequency and timeliness ofreporting, quality of financial reports, anddegree standardization.

*For readability the scale shows only three of our six risk categories. Note: The metrics draw on a number of measures and our own qualitative judgment. We use nastatistics, aggregate statistics that a banking industry and its regulators produce, as well as our own data and information about that banking industry. We assess theimportance of the level and trend of the metric in that banking industry and comparatively with its performance in other banking industries. Source: Standard & Poo

E. Competitive Dynamics76. We assess this factor by looking at the characteristics that we refer to as "industry stability," "risk appetite," and

"market distortions" (see table 8 at the end of this section). We believe that the structure and behavior of a bankingindustry influence its performance, stability, and creditworthiness. To that end, we assess a banking industry's riskappetite and performance, vulnerability to such changes in the competitive landscape as new entrants, shifts inpricing, and abrupt changes in customer behavior.

Industry stability77. To assess the stability of a banking industry, we look at three elements: the likelihood of new competitors entering

the market and related change in the competitive environment; the presence of overcapacity; and the degree of


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competitiveness, taking into account the number of market participants and balance among them.

78. In coming to an opinion about these elements, we may look at industry concentration and the legal organization andorganizational objectives of participants by principal market segments--retail branch banking, consumer finance,corporate banking, investment banking, and asset management. Furthermore, we may develop our own opinionsabout how future changes to their legal structure and strategic objectives affect the industry.

79. We may also assess barriers to entry and potential impediments to change. We may associate low barriers withintensifying competition and high barriers with stability--although perhaps at the expense of less efficiency and morecomplacency. We may take into account the capacity of domestic banks to face competition from foreign banks, andtheir potential to enter the market.

80. We do not believe that one industry model leads to lower or higher risk. In our view, a higher level of concentrationin the market may promote financial stability and resilience, but could also lead to lower efficiency than for anindustry with a large number of banks and more intense competition. Large banks in highly concentrated industriesor sectors may acquire market and pricing power that results in greater profitability. A more competitive structureto the industry or sector will feature lower margins, where banks may compensate for thin margins by moving intoriskier, higher-yielding products. But market concentration may lead to inefficiency and cartel pricing that fails tocapture banking risks sufficiently. Although competition may lead to riskier behavior by banks, it usually promotesgreater innovation and efficiency in the industry.

Risk appetite81. In this area, we generally look at the risks a banking industry is willing to take in the interests of competition and

innovation, and how well product pricing in the industry adequately protects profitability in the face of its "riskappetite." We assess four elements: the industry's risk-adjusted earnings potential; the riskiness and complexity of products compared to customer needs; the aggressiveness of commercial practices; and the use of off-balance-sheetstructures, which make risk identification and monitoring more complex.

82. We associate a banking industry with strong earnings potential in its core products, limited use of risky or complexproducts, and conservative commercial practices with lower industry risk. Conversely, we associate an industry withinadequate earnings potential in its core products, high use of risky and complex products, and aggressivecommercial practices with higher industry risk.

83. We associate systematic use of securitization and derivatives to shift risks off the balance sheet with high risk in abanking industry. The greater the proportion of risks managed off balance sheet, the higher we assess the industry'srisk appetite.

84. When we analyze risk appetite, we may compare return on equity (ROE) for the industry with ROE for othersectors in the economy and banking industries in other countries. While many factors contribute to ROE, a banking

industry with ROE that is consistently higher may indicate amplified risk-taking behavior. When we look at ROE inthis way, we do not adjust it for risk. We observe that a period of prolonged ROE outperformance is often a leadingindicator of risk.

Market distortions85. To assess market distortions, we specifically look at the market share of government-owned banks,

government-sponsored entities, or not-for-profit banks; the degree of state involvement in setting rates and inlending; and the nature of competition from nonbank competitors such as investment funds, finance companies, and


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securities markets. In our view, market distortions may influence the kinds of risk a banking industry takes amidcompetition from participants that operate under different constraints. For example, fixed pricing could preventbanks from earning profits when risk increases. Or, competition from government or nonbanks could make it moredifficult for other banks in an industry to maintain discipline with pricing. In other words, they may be forced tocompete with the lower prices that government or nonbanks offer, partly putting aside concerns about risk or

profitability. Nonbanks may need to hold less capital so they can offer lower rates on loans to customers. Andgovernment banks may be less interested in profits and more in politics.

86. A high share of government-owned banks, cooperatives, or not-for-profit banks may distort competition andprofitability. Likewise, state administrative control over lending and deposit rates or government-directed lendingprograms to priority sectors may limit competition. Nonbank competitors--or more broadly a "shadow bankingsystem" of nonbank investment structures that operate off balance sheet--may create distortions in pricing andrisk-taking as well, in particular if they are not subject to the same regulatory standards as banks.

87. We associate a banking industry with disciplined risk pricing that is free from market distortions fromgovernment-owned banks, not-for-profit banks, or nonbanks with low risk. Conversely, we associate an industry

with inadequate risk pricing, featuring competition with financial institutions that are not motivated to make profitsor hold regulatory capital, with high risk.

Table 8

Competitive Dynamics: Characteristics, Elements, And Metrics For Assessing Banking Industry Country Risk

--Risk scale*--


Characteristics --Elements and metrics--Industry stability Very low probability of new competitors

or material change in competitiveenvironment. Absence of overcapacity.Very stable competitive environmentwith balanced number of participants.

Moderately vulnerable to newentrants or material adverse changein competitive environment.Moderate overcapacity. Moderatelystable competitive environment withmoderately balanced number ofparticipants.

Highly vulnerable to new entrants ormaterial adverse change in competitiveenvironment. Possible significantovercapacity. Unstable competitiveenvironment with identifiable imbalance innumber of participants and degree ofconcentration. Industry may have excessivenumber of participants.

Risk appetite Wide preprovision margins relative topeer banking systems (in top 20%) on arisk-adjusted basis. Lending riskpremiums and pricing across riskspectrum shows high differentiation.Absence of aggressive or predatorycommercial practices. Little or no use ofsecuritization to shift risks off balancesheet.

Median preprovision margins relativeto peer banking systems (in bottom40%) on a risk-adjusted basis.Lending risk premiums adequate andpricing across risk spectrum showsmoderate differentiation. Certainmarket segments may showaggressive or predatory commercialpractices. Moderate use ofsecuritization to shift risks off balancesheet.

Narrow preprovision margins relative to peerbanking systems (in bottom 20%) on arisk-adjusted basis. Lending risk premiumsinsufficient and pricing across risk spectruminadequately differentiated. Many marketsegments show aggressive or predatorycommercial practices. Extensive use ofsecuritization to shift risks off balance sheet.ROE may exceed that of other industrialsectors in the country and banking industriesin other countries over a prolonged period.Compensation practices encourageaggressive risk-taking.

Market distortions Government-owned banks ornot-for-profit banks hold limited marketshare (less than 10%). Absence ofmarket distortions: administrativecontrol over deposit and lending rates,subsidized lending programs, andgovernment-directed lending. Absenceof distortions from nonbank competitorssuch as investment funds, financecompanies, and securities markets.

Government-owned banks ornot-for-profit banks may holdmoderate market share (less than30%). Some market distortions. Someunfavorable distortions from nonbankcompetitors.

Government-owned banks or not-for-profitbanks hold sizable market share (more than50%). Significant market distortions.Industry has high and unfavorablecompetitive distortions from nonbankcompetitors.


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Table 8

Competitive Dynamics: Characteristics, Elements, And Metrics For Assessing Banking Industry Country Risk (cont.)*For readability the scale shows only three of our six risk categories. Note: The metrics draw on a number of measures and our own qualitative judgment. We use nastatistics, aggregate statistics that a banking industry and its regulators produce, as well as our own data and information about that banking industry. We assess theimportance of the level and trend of the metric in that banking industry and comparatively with its performance in other banking industries. Source: Standard & Poo

F. Systemwide Funding88. The criteria examine four characteristics in this area: "core customer funding," "debt markets," "cross-border and

foreign currency funding," and "government role" (see table 9 at the end of this section). In assessing this factor, weaim to form an opinion about the stability, diversification, and depth of funding options available to a bankingindustry. We associate a preponderance of stable funding sources with lower industry risk and a lack of stablefunding with higher industry risk. We believe that a banking industry that largely funds itself on the moreinternationally developed capital markets is more vulnerable to risks or problems affecting the broader financialsystem, that is, "systemic risk." This vulnerability increases when cross-border regional or global capital marketsplay a dominant role in funding a banking industry. We also associate a high proportion of trading securities and

underwriting in the industry with higher industry risk because these activities require more wholesale funding--thatis, shorter-term borrowing from other banks and financial institutions--which in our view is less stable than depositfunding.

89. A banking industry may feature a mix of higher-risk and lower-risk characteristics in the area of funding: a lowerproportion of customer deposits and higher dependence on wholesale funding, but deep and diversified domesticdebt markets. Or, it may feature stable core customer deposits and a lack of access to institutional investors andwholesale debt markets, which we associate with weaker diversification.

Core customer funding90. We aim to determine the stability of core customer funding--the resources a bank generates internally through its

services for individuals and businesses who are customers and regularly use other services of the bank. We look atthree elements: the proportion of core customer deposits to total liabilities, the degree of depositor confidence andhistory of deposit runs, as well as a country's deposit insurance program with respect to deposits of individuals.

91. In our view, core customer deposits are generally more stable than deposits and placements by large corporationsand institutional investors. We believe that the stability of deposits of individuals depends on the public's overallconfidence in the banking industry and the existence and coverage of deposit guarantee programs. We may also lookat an industry's share of nonresident deposits because in our view these are less stable and a large proportionincreases the likelihood of a run. At times and in certain jurisdictions, customer deposits are prone to flight, and forthat reason, we assess the industry's track record of customer deposit retention.

92. We define "core customer deposits" as stable deposits based on customer relationships. The determination of corecustomer deposits is not standardized across countries and involves analytical judgment. According to our criteria,core customer deposits exclude deposits that are more credit sensitive because they are not based on a customerrelationship with the bank (such as large negotiable certificates of deposit), uninsured deposits in countries withexplicit insurance schemes, interbank deposits, and pfandbrief certificates (covered bonds) in Germany and similarsecured on-balance-sheet borrowings in other countries (see "Bank Spreadsheet Data Definitions," published May 2,2005).


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Debt markets93. In this area, we aim to form an opinion about a banking industry's borrowing on the markets. We look at two

elements: First, we determine the industry's ability to borrow securities with longer maturities so that it can bettermanage mismatches between assets and liabilities and reduce asset-liability management (ALM) risk. Secondly, weassess the diversification of funding sources by segment and type of instrument, including the role securitization and

derivatives, if it exists. A banking industry that can securitize loans has more funding flexibility, in our view.

94. We associate diversified access to well-functioning domestic debt markets, including secured borrowing viarepurchase agreements with lower industry risk and high reliance on cross-border sources of funds with higherindustry risk.

Cross-border and foreign currency funding95. In this area, we are generally sizing up a banking industry's sources of funding from participants or markets in other

countries, which may represent a large share of the total. We look at two elements: First, we determine the level of cross-border funding or nonresident deposits that an industry uses to finance domestic assets (essentially lending).Second, we calculate the proportion of borrowing in foreign currencies as a share of liabilities (mainly all sources of

funding).96. A banking industry may find it advantageous to draw upon the international debt markets when liquidity is ample

and inexpensive and investor appetite is high. However, if conditions change, overreliance on this strategy maybackfire, leaving the industry vulnerable to investor flight and herd mentality as well as contagion--the spread of ashock from one market to others.

Government role97. Lastly, we assess the role of a government in bank funding by taking into consideration two elements: the

government's track record in providing guarantees and liquidity in times of turmoil, and the nature of the centralbank's lending facilities--including its general responsiveness and flexibility to changing needs.

98. Governments--often through their central banks or other agencies--may lend funds to banks and guarantee theirborrowings to maintain stability and confidence in the financial system and promote the smooth functioning of theshort-term interbank market. Also, governments or central banks in countries with key reserve currencies mayprovide cross-border foreign exchange swaps toward this end (for example, when the U.S. Federal Reserve Bankprovided dollar liquidity via foreign exchange swaps to several countries during the course of 2009).

99. Supranational organizations such as the International Monetary Fund may serve a somewhat similar function; whenneeded they lend to governments to maintain order and calm in the international debt markets.

100. We believe the effectiveness and capacity of government programs and actions is important to maintainingconfidence in the financial system in times of stress. The regulations and safeguards on deposits and liquidity

facilities that central banks and supervisors impose comprise a framework for bank funding, whose riskiness mayvary from country to country.


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Table 9

Systemwide Funding: Characteristics, Elements, And Metrics For Assessing Banking Industry Country Risk

--Risk scale*--


Characteristics --Elements and metrics--Core customer funding Very high proportion of core customer

deposits to total liabilities. High degreeof customer depositor confidence, withcomplete absence of bank deposit runsand long-standing and successfuldeposit insurance scheme.

Moderate proportion of core customerdeposits to total liabilities. Adequatecustomer depositor confidence, withinfrequent bank deposit runs over aperiod that includes several financialcrises and adequate deposit insurancescheme.

Very high proportion of wholesalefunding to total liabilities. High use ofwholesale borrowings to fund loans andother illiquid assets. Weak customerdepositor confidence with periodicdeposit runs over several crises. Industrylacks deposit insurance or scheme isinadequate in size or coverage.Significant volume swings in retaildeposits.

Debt markets Banks are able to borrow for longermaturities to limit ALM risk. Fundingsources are highly diversified bysegment and type of instrument.

Banks have somewhat limited capacityto borrow at maturities to limit ALM risk.Funding sources moderately diversifiedby segment and type of instrument;some gaps exist.

Banks cannot raise long-term funds andmedium-term debt markets are limited.Funding sources concentrated bysegment and type of instrument.

Cross-border andforeign currencyfunding

Low cross-border funding ornonresident deposits to financedomestic assets. Foreign currencyborrowing constitutes low proportion ofindustry's liabilities (less than 10%).

Moderate reliance on cross-border fundsor nonresident deposits to domesticassets. Foreign currency borrowingconstitutes moderate proportion (lessthan 30%) of industry's liabilities.

Very high reliance on cross-borderfunding or nonresident deposits tofinance domestic assets. Foreign currencyborrowing constitutes very highproportion (more than 40%) of industry'sliabilities.

Government role Government has highly successful trackrecord of providing guarantees andliquidity during periods of marketturmoil. Central bank lending facilitiesare very strong in terms of its capacityto service the size of the industry'sfunding needs, and the government ishighly responsive and flexible tochanging needs.

Government has moderately successfultrack record of providing guarantees andliquidity during periods of marketturmoil. Central bank lending facilitiesare adequate in terms of its capacity toservice the size of the industry's fundingneeds, and government is moderatelyresponsive and flexible to changingneeds.

Government has poor track record ofproviding guarantees and liquidity duringperiods of market turmoil. Central banklending facilities are limited in terms ofits capacity to service the size of theindustry's funding needs, and governmentis often unresponsive and inflexible tochanging needs.

*For readability the scale shows only three of our six risk categories. Note: The metrics draw on a number of measures and our own qualitative judgment. We use nastatistics, aggregate statistics that a banking industry and its regulators produce, as well as our own data and information about that banking industry. We assess theimportance of the level and trend of the metric in that banking industry and comparatively with its performance in other banking industries. ALM--Asset-liabilitymanagement. Source: Standard & Poor's.

3. Gross Problematic Assets101. Our estimates for "gross problematic assets" are currently a key component of the BICRA methodology. However,

we are contemplating replacing these with estimates of credit losses for each banking industry.

4. Related Research And Criteria Banking Industry Country Risk Assessments Advance Notice Of Proposed Criteria Change: Banks, Finance Companies, And Institutional Brokers, March 11,

2010 Enhanced Methodology And Assumptions For Rating Government-Related Entities, June 29, 2009 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 Methodology And Assumptions: Risk-Adjusted Capital Framework For Financial Institutions, April 21, 2009


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Franchise Stability, Confidence Sensitivity, And The Treatment Of Hybrid Securities In A Downturn, Dec. 1,2008

Jurisdiction-Specific Adjustments To Recovery And Issue Ratings, June 20, 2008 Methodology: Banking Industry Country Risk Assessments, June 6, 2006 Bank Spreadsheet Data Definitions, May 2, 2005 FI Criteria: Bank Rating Analysis Methodology Profile, March 18, 2004 Sovereign Risk For Financial Institutions, Feb. 16, 2004

102. These criteria represent the specific application of fundamental principles that define credit risk and ratingsopinions. Their use is determined by issuer- or issue-specific attributes as well as Standard & Poor's RatingsServices' assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodologyand assumptions may change from time to time as a result of market and economic conditions, issuer- orissue-specific factors, or new empirical evidence that would affect our credit judgment.


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Country Risk 2

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