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At a time when bank executives are apprehensive about the credibility of credit ratings, Moody's Investors Service, the credit rating arm of Moody's Corp. (MCO - Analyst Report), has brought further disappointment. Following its review of 8 major U.S banks, the rating agency lowered the senior holding company ratings of Morgan Stanley (MS - Analyst Report), The Goldman Sachs Group, Inc. (GS - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report) and The Bank of New York Mellon Corporation (BK - Analyst Report).

Moody’s downgraded BNY Mellon’s long-term senior unsecured debt to A1 from Aa3 and subordinated debt to A2 from A1. Similarly, Goldman’s long-term senior unsecured debt was downgraded to Baa1 from A3, whereas its subordinated debt was downgraded to Baa2 from Baa1.

Also, JPMorgan’s long-term senior unsecured debt was lowered to A3 from A2 and subordinated debt was reduced to Baa1 from A3. Further, the rating agency lowered Morgan Stanley’s long-term senior unsecured debt to Baa2 from Baa1 and subordinated debt to Baa3 from Baa2.

The ratings downgrade reflects Moody’s belief of there being less chances of the U.S. government bailing out financial institutions in the case of a future financial crisis. Regulatory guidelines under the Dodd-Frank Act prohibit the use of taxpayers’ money to bail out a failed bank. The Act also demands formation of a decision-making body to systematically wind down troubled firms. These regulations might increase losses for debtors or compel them to convert stakes to equity.

On the other hand, Moody’s affirmed the senior holding company ratings of four other banks, namely Bank of America Corp. (BAC - Analyst Report), Citigroup Inc. (C - Analyst Report), State Street Corp. (STT - Analyst Report) and Wells Fargo & Co. (WFC - Analyst Report). We believe that the reiteration of ratings reflect these banks’ improved capital position for the quarter ended Sep 30.

Given the sluggish economic recovery and stringent regulations, the ratings downgrade could increase the banks’ cost of capital. Overall, banks are taking considerable measures to meet regulatory capital requirements. However, whether these endeavors prove successful is yet to be seen.


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