Moody's cuts credit ratings of 15 major banks, including Bank of America, HSBC
Downgrading was not unexpected, experts say
In a move that many said was not unexpected, Moody's Investors Service has lowered the credit ratings of 15 major banks. These institutions include Bank of America, JPMorgan Chase and Goldman Sachs. The credit agency says the reason behind the downgrade is their long-term prospects for profitability and growth are shrinking.
Moody's, the ratings agency said that it is expressing concern about banks with significant financial markets, because those markets have become so volatile.
"What's going to happen now, the banks will have to keep more money on hand and won't be able to lend as much money, that means they will make less money," Al Jazeera's Scott Heidler says.
Moody's global banking managing director Greg Bauer says that these banks were vulnerable to "outsized losses." These mega-banks are all major players in the global stock and bond markets, which have become extremely volatile.
Bauer points out that some of the banks, like JPMorgan Chase and HSBC, have reliable buffers in more stable businesses which could act as "shock absorbers" during a crisis.
Moody's concern over the ability of these banks to repay their debts during times of crisis all led to the current downgrades. Moody's had said in February that it was considering downgrading the credit ratings of major banks in the U.S. and in Europe. A downgrade usually means banks will have to pay more for its debt. The uptick is that with interest rates already at rock-bottom levels, the downgrades may not affect the cost of funding for the banks that much.
Investors were taking the news in stride. Stocks of major U.S. banks rose in after-hours electronic trading. Moody's made its announcement after regular stock trading had closed. Citigroup says that it "strongly disagrees" with Moody's assessment, along with Morgan Stanley.
This latest news comes at a time of great uncertainty in the global economy. Europe's currency union is under threat, the U.S. economy is slowing and the red-hot economies of India, Brazil and China are winding down. Financial markets have also been extremely volatile.
The Dow Jones industrial average plunged 251 points, its second-worst loss of the year. New reports indicate slower manufacturing in the US and China made investors fearful that the global economy could be heading for another slump.
However, in its latest report, Moody's didn't treat all large banks alike. It sorted the banks it was downgrading into three categories, with JPMorgan, HSBC, and Royal Bank of Canada in the top one.
© 2012, Catholic Online. Distributed by NEWS CONSORTIUM.
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