Moody’s Investors Service is reviewing the credit ratings of the largest U.S. banks in light of emerging policies designed to help resolve failing banks, and the reduced prospect of government support.
The rating agency has placed the senior and subordinated debt ratings of the holding companies for the six largest US banks on review as it considers reducing its government support assumptions due to bank resolution policies that are being developed in the U.S.
Four of the firms are facing possible downgrades, including Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo, it notes. Whereas the direction of its reviews of Bank of America and Citigroup are uncertain due to potentially offsetting influences, such as improvements in the standalone credit strength of their main operating subsidiaries, it says.
Two other banks, Bank of New York Mellon and State Street, which are already on review for a possible downgrade, are also included in this review.
Moody’s says the review follows its announcement back in March that it would reassess its support assumptions for bank holding companies in the U.S., and that it would consider whether to revise these assumptions by the end of the year.
“In the past year, we have seen progress towards establishing a framework to credibly resolve these large systemically-important banks, as called for under the Dodd-Frank Act,” said Robert Young, managing director at Moody’s. “We have also seen greater cooperation and discussion among international banking regulators to manage the coordinated resolution of global banking groups.”
Moody’s notes that as US bank resolution policies continue to evolve, it will assess the opposing forces that may impact bondholders at the holding company level if a bank was to become financially distressed. On one hand, a lower level of systemic support could result in a higher probability of default. Conversely, the policies may facilitate a more orderly workout and a required minimum level of holding company debt that may well limit losses in the event of a default.
“In other words, the risk of default may be increasing because authorities may be less likely to support a banking group, while losses in the event of default (loss severity) may be decreasing,” said Young.