15 Major Investment Banks See Ratings Cut by Moody's

It has just been announced that Moody's has downgraded the debt ratings of 15 major international banks and securities firms. This move could cost the banks billion of dollars in extra collateral. The US banks that fell into this group include Bank of America, Citigroup, Goldman Sachs, JPMorgan, and Morgan Stanley.

By: Mary Thompson, Margaret Popper
Published: Thursday, 21 Jun 2012
CNBC

Moody’s Investors Service downgraded the debt ratings of 15 major international banks and securities firms on Thursday, a move that could cost the banks billions of dollars in extra collateral.

U.S banks that were downgraded included:

Bank of America [BAC 7.82 -0.32 (-3.93%) ], whose long-term debt rating was cut one notch, to BAA2 from BAA1,

Citigroup [C 27.83 -1.03 (-3.57%) ], which was cut two notches, to BAA2 from A3,

Goldman Sachs [GS 93.90 -2.65 (-2.74%) ], cut by two notches, to A3 from A1,

JPMorgan [JPM 35.51 -0.94 (-2.58%) ], cut by two notches, to AA3 from A2

and Morgan Stanley [MS 13.96 -0.24 (-1.69%) ], also cut by two notches, to BAA1 from A2.

All the ratings cuts for the US banks were expected, except for Morgan Stanley, whom some thought would be cut three notches instead of two.

The ratings agency said that the banks were downgraded because their long-term prospects for profitability and growth are shrinking.

The ratings agency said it was especially concerned about banks with significant capital market activities during a time of increased volatility in markets.

A downgrade usually means that it becomes more costly for banks to raise money by selling debt. Investors demand higher interest for riskier debt, which is what the downgrades represent.

Royal Bank of Canada and nine European banks, including Barclays Bank [BARC-GB 202.30 -3.45 (-1.68%) ], Deutsche Bank [DB 35.51 -1.25 (-3.4%) ], BNP Paribas and Credit Suisse [CS 18.57 -0.74 (-3.83%) ] also had their ratings cut.

Moody’s announced earlier this year that it would review the ratings of 17 global investment banks and has already downgraded Macquarie and Nomura.

The current credit actions are part of a comprehensive review of the overall global banking system by Moody’s.

In the middle of last month, Moody’s downgraded Italian, Spanish, German and Austrian bank credit ratings. The U.S. banks with global capital markets capabilities have had an open dialogue with the ratings company, in an effort to soften the severity of the downgrades.

This afternoon’s announcement affected the long-term debt ratings of the bank-holding companies of five of the biggest U.S. banks; only Wells Fargo [WFC 32.34 -0.47 (-1.43%) ] was not on the list. Moody’s also looked at the short-term debt of the five bank-holding companies and the main bank operating subsidiaries of all except JPMorgan.

In an interview with CNBC in April, Morgan Stanley Chairman and CEO, James Gorman said the downgrade could affect about 8 percent of the firm’s derivatives contracts.

Downgrades of its senior debt could cost Morgan Stanley between $868 million and $7.2 billion in additional collateral and termination payments on derivatives contracts, according to SEC filings.

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