The eight major U.S. banks global systemically important banks (GSIBs) had their ratings downgraded on Thursday by credit rating agency Standard & Poor’s Ratings Service (S&P) on diminishing expectations that the U.S. government would bail them out if they ran into financial trouble.
Given the progress that has been made on developing resolution plans for the big banks, government support for a failing institution is now “uncertain”, the rating agency says in a statement. As a result, S&P is removing the prospect of that support from its ratings on all of the U.S. GSIBs.
The rating agency downgraded its ratings for the non-operating holding companies of: Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp., The Goldman Sachs Group, and Wells Fargo & Co. The rating outlooks on those entities are stable.
“The rating actions reflect our revised assessment of the U.S. government’s likelihood of providing extraordinary support to the banking system to ‘uncertain’ from ‘supportive’. We believe the U.S. resolution framework is now ‘effective’, which implies that the probability that a U.S. GSIB would receive extraordinary government support if it came under stress is lower,” the S&P statement says.
“Although we do not rule out the possibility that a U.S. GSIB could receive extraordinary government support if an orderly liquidation proved more disruptive than expected, the predictability of such support, in our view, has significantly declined such that we view it as uncertain,” the statement adds.
S&P has changed view on the likelihood of government support follows a recent policy decision from the U.S. Federal Reserve outlining the total loss-absorbing capacity (TLAC) requirements for U.S. GSIBs, the statement says. Those rules are expected to be finalized in 2016. The S&P statement notes that, along with the TLAC requirements, other key hurdles in the development of the U.S. resolution regime have now been addressed.
The ratings for the banks’ operating subsidiaries remains unchanged by this rating action on the holding companies. In fact, S&P’s ratings of the operating subsidiaries at Bank of America, Citigroup, Morgan Stanley, and Goldman Sachs may yet be upgraded, pending regulators’ final decisions on which instruments will count toward TLAC, the S&P statement says.