Moody's downgrades debt of 4 big US banks

PUBLISHED : Friday, 15 November, 2013, 12:26pm
UPDATED : Friday, 15 November, 2013, 12:44pm

Moody’s Investors Service cut the debt ratings for four big US bank holding companies, including Goldman Sachs and JPMorgan Chase, citing its increasing confidence that the US government will not bail out the companies if they fail.

The cuts may increase banks’ borrowing costs and force them to post more collateral in derivatives trades, weighing on their profits.

The downgrades also underscore how regulators are successfully convincing at least some parts of the bond markets that in a crisis, investors in the bank holding companies will likely have to take losses.

The Federal Deposit Insurance Corp (FDIC) has hosted dozens of meetings with bond investors, analysts, and other stakeholders since last year to explain how this scenario would play out.

In a statement on Thursday, Moody’s managing director Robert Young said the US government’s bank regulators have created a credible plan.

With the banks expected to receive less government support, Moody’s said it was cutting its ratings for holding companies for Bank of New York Mellon, Goldman Sachs, JPMorgan Chase and Morgan Stanley by one notch.

Moody’s confirmed senior holding company ratings for Bank of America, Citigroup, State Street and Wells Fargo.

Representatives of Bank of New York Mellon, Goldman Sachs and JPMorgan declined to comment. A Morgan Stanley spokesman had no immediate comment.

Under the plan created by the US Federal Reserve and the FDIC, the FDIC would take over a failing bank holding company, wiping out the bank’s shareholders and hitting some bondholders with losses.

The steps would keep the operating subsidiaries, such as the deposit-taking banks, alive.

... addressing too-big-to-fail has to be among the most important goals of the post-crisis period
Janet Yellen, nominee for Fed chairman

Bond investors and bank executives are watching to see how the liquidation plans might change how banks fund themselves – in particular, how much debt banks might issue from their holding companies, and how much their operating subsidiaries might issue.

David Fanger, a Moody’s senior vice-president, said in an interview that debt from the subsidiaries has become more creditworthy as the government has developed liquidation plans to focus on the holding companies.

The Fed plans to issue a proposal to require the largest banks to issue minimum amounts of long-term, unsecured debt from their holding companies to absorb losses in a liquidation.

The federal government was forced to bail out several major banking and insurance companies starting in 2008, as the world’s financial system stood at the brink of disaster.

That prompted demands for rules that would prevent a repetition of any situation in which a company would be deemed “too big to fail”.

At a Senate confirmation hearing on Thursday, Fed chairman nominee Janet Yellen said “addressing too-big-to-fail has to be among the most important goals of the post-crisis period”.

Downgrades often increase a company’s borrowing costs over time, but given that banks have so many subsidiaries that can issue debt, the impact of a holding company downgrade may not always be dramatic.

Banks also often have to post more collateral to support derivatives trades when they are downgraded. But because many banks trade the instruments in operating subsidiaries instead of their holding companies, these downgrades may not force big collateral postings.

After the downgrades, the holding company for Morgan Stanley is now rated the same as Bank of America’s and Citigroup’s holding companies: Baa2, or two steps above junk status. Goldman was cut to a level three steps above junk, while Wells Fargo remains five steps above. BNY Mellon is six steps above.