Moody's Cuts Ratings Of Four Large U.S. Banks

(RTTNews) - Moody's Investors Service said Thursday that it has lowered the long-term debt ratings of four big U.S. bank holding companies, noting that the U.S. government would be less likely to help these banks repay bondholders in the event of a crisis.

The credit ratings agency lowered the senior holding company debt ratings of Morgan Stanley (MS), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Bank of New York Mellon Corp. (BK) by one notch.

However, Moody's confirmed the senior holding company ratings of Bank of America Corp. (BAC), Citigroup Inc. (C), State Street Corp. (STT) and Wells Fargo & Co. (WFC).

The credit ratings agency said it has concluded its review of these eight large U.S. banking groups that began in August, noting that the rating outlook was stable for all the eight bank holding companies as well as their main operating subsidiaries.

Moody's said its review of the banks focused on the opposing effects of the FDIC's single point of entry receivership or SPE framework that influence risks for bondholders at the bank holding company level. The agency noted that the SPE is designed to allow regulators to restore the solvency of a distressed entity without using public funds.

As envisioned by U.S. regulators, the SPE approach would impose losses on U.S. bank holding company creditors to recapitalize and preserve the operations of the group's systemically important subsidiaries in a stress scenario. As a result, the holding company creditors are unlikely to receive government support, signaling a higher risk of default.

According to Moody's, the first opposing effect of the SPE framework is the reduced likelihood and predictability of systemic support. The second is the possible reduction in the severity of losses for bank holding company creditors in case of a default under a future U.S. bank resolution.

Accordingly, Moody's downgraded Morgan Stanley's long-term senior unsecured debt to Baa2 from Baa1, while Goldman Sachs was downgraded to Baa1 from A3, JP Morgan Chase was downgraded to A3 from A2, and Bank of New York Mellon was downgraded to A1 from Aa3.

Moody's also downgraded Morgan Stanley's subordinated debt to Baa3 from Baa2, Goldman Sachs subordinated debt downgraded to Baa2 from Baa1, JPMorgan Chase subordinated debt downgraded to Baa1 from A3, Bank of New York Mellon subordinated debt downgraded to A2 from A1.

Meanwhile, Citigroup's Citibank NA subsidiary's long-term deposit rating was upgraded to A2 from A3 and short-term rating lifted to Prime-1 from Prime-2. Bank of America's long-term deposit rating was upgraded to A2 from A3 and its short-term rating was also upgraded to Prime-1 from Prime-2.

State Street's State Street Bank & Trust Co. subsidiary had its long-term deposit rating downgraded to Aa3 from Aa2, and subordinated debt downgraded to A1 from Aa3.

Moody's lowered the standalone baseline credit assessments or BCA of Bank of New York Mellon and State Street Bank and Trust, both to a1 from aa3, to reflect the long-term profitability challenges facing these highly-rated custodian banks.

The rating agency also raised the standalone BCAs of both Bank of America N.A. as well as Citibank N.A. to baa2 from baa3 to reflect positive changes in the banks' credit profiles including declining legacy exposures and strengthening capital.

Robert Young, Managing Director of Moody's Investor Service said, "We believe that U.S. bank regulators have made substantive progress in establishing a credible framework to resolve a large, failing bank. Rather than relying on public funds to bail-out one of these institutions, we expect that bank holding company creditors will be bailed-in and thereby shoulder much of the burden to help recapitalize a failing bank."

In August, Moody's said it may cut the credit ratings of some of the largest U.S. banks in response to the possible reduction of government support assumptions. At that time, the credit ratings agency placed the senior and subordinated debt ratings of the holding companies for these banks on review.