Moody’s warned of bank rating cuts

Moody’s indicated that it could cut the credit ratings of the six biggest US banks, saying they might be not protected by federal government if they got into trouble in the future. Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo could be downgraded, the rating agency said on Thursday. The ratings of Bank of America and Citigroup are also under review, but with “direction uncertain”, Moody’s said.

Wall Street reforms under the Dodd-Frank Act ban the use of taxpayer money to save failing banks and require the setting up of a resolution authority to wind down institutions before they get into trouble, imposing losses on creditors in the process.

“In the past year, we have seen progress towards establishing a framework to credibly resolve these large systemically important banks, as called for under the Dodd-Frank Act,” said Robert Young, Moody’s managing director. “We have also seen greater co-operation and discussion among international banking regulators to manage the co-ordinated resolution of global banking groups.” he added for Financial Times.

Moody’s review will take in both senior and subordinated debt issued by the six big banks, plus State Street and Bank of New York Mellon, which were already on notice of potential downgrades. Lower credit ratings could raise the cost of capital for bank holding companies.

The two banks with the lowest senior debt ratings, Bank of America and Citigroup, could be either downgraded or upgraded, since improvements in their balance sheets may outweigh the loss of government support, Moody’s said.

It is the second big review of banking sector ratings conducted by Moody’s in two years. Last year, it attracted criticism from industry executives for a wave of downgrades of the 15 largest global banks. This first review was designed to incorporate lessons from the credit crisis, when risks in banks’ capital markets became evident, and the agency warned at the time that it would reassess its assumptions of government support at a later date.

S&P said in June that it believed US banks were still “too big to fail” and that operating subsidiaries may still attract government bailouts, but that it could downgrade holding companies to reflect the possibility that their bondholders would have to shoulder losses.