DBRS Inc. today issued a special comment explaining how it assesses the impact of the regulatory environment with regard to its U.S. bank ratings.

It notes that under most circumstances, DBRS believes there is insufficient certainty that support would be forthcoming for a troubled U.S. bank. “As a result, DBRS does not boost the vast majority of US bank ratings beyond their assessed fundamental strength,” it says. “Consequently, DBRS reiterates that bondholders need to rely upon the intrinsic strength of a U.S. bank, rather than counting on the regulators for support.”

DBRS explains that it rates banks differently for a variety of reasons, including differences in franchise strength, management ability, earnings power and the assessment of their risk profiles as well as its view of the bank’s relationship with its regulators. “We consider each of these factors as critical rating drivers,” it says. “DBRS’s ratings are not based upon a mechanical model driven by a formulaic approach.”

“Given that the U.S. government does not explicitly guarantee the U.S. banking industry, bondholders cannot be assured that the regulators will support troubled banks, only that U.S. regulatory authorities will take pre-emptive action to try to avoid bank problems and failures,” it adds. “Therefore, given the uncertainty of the outcome for a troubled U.S. bank, DBRS does not ascribe a substantial ratings benefit from supervisory support actions, since there is no certainty as to which banks would be supported or the extent to which that support would be forthcoming.”

“Moreover, legislation and regulation are generally moving to reduce governments’ ability to protect and support their banks, not only in the United States, but also in Europe and elsewhere in the world. As such, there is a powerful argument that bondholders need to place reliance upon the fundamental strength of a bank, rather than counting on the regulators for support,” it concludes.