• Moody’s Cuts Ratings of 15 Major Investment Banks
  • July 5, 2012 | Author: Raechelle M. Munna
  • Law Firm: Jones Walker LLP - New Orleans Office
  • On June 21, 2012, Moody’s Investors Service downgraded 15 major international banks and securities firms, 5 of which were some of the biggest U.S. banks. The U.S. banks that were downgraded included:

    • Bank of America, whose long-term debt rating was cut one notch, to BAA2 from BAA1;
    • Citigroup, which was cut two notches, to BAA2 from A3;
    • Goldman Sachs, which was cut by two notches, to A3 from A1;
    • JPMorgan, which was cut two notches, to A2 from Aa3; and
    • Morgan Stanley, which was cut by two notches, to BAA1 from A2.

    The rating agency said that its reasoning for the downgrades was because the banks’ long-term prospects for profitability and growth are shrinking. Moody’s also stated that it was especially concerned about banks significantly involved in capital market activities during a time of increased volatility in markets.

    As a result of the downgrades, it may become more costly for the banks to raise money by selling debt. Investors will likely demand higher interest for riskier debt, which is what the downgrades represent. While many experts say that they expect the downgrades would have little effect on consumers, they could eventually lead to higher rates for consumers and even tighter lending policies.

    The stock markets did not appear to be too rattled by the news; in fact, most of the bank stocks ended the day higher than they started. The prospect of downgrades had been looming since Moody’s said in February it was reviewing 17 financial firms with capital-markets operations. Investors say that the downgrades reflect risks that the market has recognized for years. As such, the downgrades effectively validated what the market had already done. Notably, Moody’s had not imposed a comprehensive downgrade of banks since 2007.

    Among the international investment banks to be downgraded were Royal Bank of Canada and Nine European banks, including Barclays Bank, Deutsche Bank, BNP Paribas, and Credit Suisse. Last month, Moody’s downgraded Italian, Spanish, German, and Austrian bank credit ratings.