Moody’s looks to trim bank ratings for less government support

Credit ratings agency Moody’s Investors Service has warned that it could cut the credit ratings of major US banks due to an expected reduction in the US government’s support for them.

Moody’s reasoned Thursday in an announcement that if big US banks like JPMorgan Chase & Co and Goldman Sachs Group Inc. run into financial problems, the chances that government would bail them out is low, Reuters reported.

Wells Fargo & Co. and Morgan Stanley are other banks Moody’s has named in its announcement on bonds downgrading, while ratings for Bank of America Corp and Citigroup Inc. might change in either direction.

Proposals over the last year have called for forcing debt investors to save failing banks instead of using American taxpayers’ money.

According to Moody’s, US bank’s debt may be less creditworthy as bondholders bear more of the burden to save tottering banks.

The firm says the factors it is considering include a lower level of systematic support for big banks that translates into limiting the losses to investors in a default scenario.

“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 Moody’s managing director Robert Young. “We have also seen greater cooperation and discussion among international banking regulators to manage the coordinated resolution of global banking groups.”

Moody’s downgraded its ratings on Goldman, JP Morgan, Morgan Stanley, Bank of American and Citigroup in June 2012.

Banks borrow huge amounts of money, more than other types of corporations, to finance their activities. Downgrades can increase costs of a bank’s borrowing and make it harder for them to find buyers for their debt. This can force the bank to post more collateral in derivative trades, reducing its profitability and draining the bank’s cash.

A reduced rating can also mean a lower chance of trading partners entering lucrative transactions with a bank.