Moody’s downgrades three US banks

Today, Moody's downgraded the credit rankings of three of the United Stets top banks. Bank of America, Citigroup and Wells Fargo were downgraded over concerns that the US government would be less likely to rescue them if they indeed faced failure.

By Shannon Bond in New York
September 21, 2011 6:50 pm
Financial Times

Moody’s downgraded the credit ratings of Bank of America, Citigroup and Wells Fargo, three of the biggest US banks, over concerns that the US government would be less likely to rescue the lenders if they faced failure.

“Moody’s believes that the government is likely to continue to provide some level of support to systemically important financial institutions. However, it is also 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 wrote on Wednesday.

Bank of America, the largest US bank by assets, had its long-term senior debt cut from A2 to Baa1 and its short-term debt cut from Prime 1 to Prime 2. The downgrades “do not reflect a weakening of the intrinsic credit quality” of the bank, Moody’s said, but warned that the bank continued to face risks from its mortgage holdings.

The short-term rating of Citigroup, the third-biggest US bank, was also cut from Prime 1 to Prime 2, but its long-term rating was held at A3. Moody’s said the downgrade was “not a reflection of Citigroup’s liquidity profile, which strengthened significantly in the past two years and is robust.”

Senior debt at Wells Fargo, the largest US mortgage lender, was downgraded from A1 to A2, but Moody’s affirmed its Prime 1 rating on the bank’s short-term debt.

On Wednesday afternoon in New York trading, BofA’s shares fell 3.3 per cent to $6.68 and Citi’s stock was down 0.1 per cent at $26.90, while Wells Fargo shares shook off an initial fall following the announcement and were up 0.7 per cent to $24.84.

The ratings agency said the outlook on all three banks’ senior ratings remains negative, suggesting that further downgrades were possible. The move followed notice that the banks were placed under review in June.

The negative outlook “reflects the possibility it may further reduce its systemic support assumptions in the future as a consequence of the process set in motion by the enactment of the Dodd-Frank Act”, Moody’s said. “The orderly liquidation authority included in Dodd-Frank demonstrates a clear intent to impose losses on bondholders in the event that a systemically important bank ... was nearing failure.”

Moody’s said that because measures to reduce systemic risk, including resolution plans and reforms to the over-the-counter derivatives market, were still pending, it believed it would be “very difficult” for the US government to wind down a failing bank “without a disruption of the marketplace and the broader economy”.

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