Three of the United States’ top banking giants had their ratings downgraded as announced by Moody’s Investors Services on Wednesday. In what appears to be a statement that the “too big to fail” era may be over, Citigroup, Wells Fargo and Bank of America have all seen their ratings drop.
Top Banks Lose Their Ratings
In what some are calling a shocking blow to the financial sector, Moody’s downgraded three of the top banks’ ratings this week:
- Bank of America: Long-term rating dropped two notches to Baa1
- Wells Fargo: Long-term rating lowered one notch to A1
- Citigroup: Short-term debt lowered one notch to Prime-2
A spokesman for Bank of America, which received the steepest downgrade, stated in a CNN Money article, “While we disagree with their conclusion and we believe our ratings should be higher, to minimize any potential impact of this decision on our business, we have been managing our liquidity carefully and we have prefunded our planned borrowing needs for the year.”
Citigroup responded similarly to its downgrade, but noted that it did not believe it would affect its funding in the short- or long-term.
Why the Ratings Were Lowered
Among the primary reasons that the agency dropped the ratings for the three banks was that it felt the U.S. government is now in a position where it is less likely to step in to save a troubled financial institution.
In its downgrade note of Wells Fargo’s stock, Moody’s wrote, “It is more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute.”
The ratings agency also cited Wall Street reform’s Dodd-Frank legislation as a reason the U.S. government might consider failing a bank. This post-financial crisis legislation allows the FDIC to liquidate big banks and hand over their losses to bondholders.
As for whether Moody’s has plans to increase the banks’ ratings, it doesn’t look likely. The agency offered a negative outlook for all three banks, leaving little possibility that they will see their downgrades reversed anytime in the near future.
