Some of the nation’s largest banks are facing the possibility of a downgraded credit rating from Moody’s Investors Service, which the company announced on Thursday. Moody’s says it is making this consideration due to concerns the government may not support banks in times of trouble.
Ratings of Banking Giants Being Reviewed
Moody’s, a unit of Moody’s Corp., said it is in the process of reviewing the ratings of financial giants like Citigroup Inc., Bank of America Corp. and Wells Fargo & Co., which are currently rated at A3, A2 and A1, respectively, in hopes of determining whether these institutions deserve a downgrade.
The company has historically assumed the government would back banks up in a time of crisis when determining credit ratings. Now, however, Moody’s analysts are unsure whether the government will support banks since the new Dodd-Frank financial overhaul has been put in place.
Other banks included in the list of those to review include J.P. Morgan Chase & Co, Morgan Stanley, Goldman Sachs Group Inc., Bank of New York Mellon Corp. and State Street Corp.
How Could Banks Be Affected?
If Moody’s decides that the large banks are lacking support from the government, their ratings could indeed drop one notch or more. These downgrades could affect the banks by increasing the cost of borrowing, especially as investors demand more compensation for the higher risk.
But Moody’s claims some improvement in banks’ operations could help to balance out the lack of support. For instance, the company said it would take into account improvements in asset quality and capital at Citigroup and Bank of America. Also, Moody’s says it is not likely to completely withdraw the assumption that banks could receive support, but instead reduce it.
Some experts say that the “too big to fail” theory hasn’t really gone anywhere anyway and the likelihood of the government bailing out a major bank is still strong despite the financial overhaul.
In fact, the Dodd-Frank rules include a “systemically important” designation, which is a category devised for firms considered too big to fail–or big enough to threaten the entire financial system if they fail. This one designation is enough for experts to believe the government will still step in if necessary.
