Downgrade of three major U.S. banks bodes ill for chances of help in stormy waters
Moody’s announced rating downgrades for Bank of America, Citigroup and Wells Fargo may lower possibility of government bail-outs for major financial institutions amid changing regulatory landscape September 25, 2011 | Wong Wei HanOn September 21st, Moody’s Investors Service announced a string of debt rating downgrades for top US financial institutions, including Bank of America, Citigroup and Wells Fargo. The downgrades are seen as a result of the ongoing regulatory reform in the country where the government may no longer be willing to bail out large banks on the verge of failure. Among the trio, Bank of America was the most affected, with its rating cut by Moody’s from A2 to Baa1 for long-term senior debt; its short-term debt rating was pared down from Prime-1 to Prime-2, while long-term deposit ratings of Bank of America, N.A. were pulled down from Aa3 to A2. Citigroup similarly saw its short-term rating downgraded to Prime-2 from Prime-1, although Moody’s also confirmed the A1 long-term and Prime-1 short-term ratings of Citibank N.A. to reflect the bank’s improving standalone credit profile. Wells Fargo also felt the cut, with its supported long-term senior debt rating downgraded from A1 to A2.In explaining the rationale triggering the downgrades, Moody’s referred to a lower probability for the US government to extend support for “highly interconnected, systemically important institutions” that are traditionally seen as too big to fail, a development which Moody’s attributed to the regulatory reform set in motion by the Dodd-Frank Act in July 2010. Rules to be put in place by the act will ideally limit interconnectedness among major banks and hence reduce contagion of systemic risk if an institution collapses. For Moody’s, this translates to “an increased possibility that the (US) government might allow a large financial institution to fail, taking the view that contagion could be limited.” Unsurprisingly, the downgrades sent the stocks of the affected banks tumbling by varying degree. Analysts commenting on the downgrades however agree that the impact on the banks’ businesses and operations will be limited, citing the rating actions as more of a ... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
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