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Moody's warns big banks of possible downgrades

Moody's warns big banks of possible downgrades

June 3rd, 2011 in News

Moody's Investors Service said Thursday that it was reviewing the ratings of Bank of America Corp. Citigroup Inc. and Wells Fargo & Co. for possible downgrades.

The rating agency gives the three banks fairly strong investment-grade credit ratings. But those grades are based on Moody's assumption that the federal government would prevent them from failing in a crisis. Moody's said Thursday that this "too big to fail" presumption may no longer be true.

In a statement accompanying the announcement, Moody's senior vice president Sean Jones said the Dodd-Frank Act makes clear the government "does not want to bail out even large, systemically important banking groups." One provision of the Dodd-Frank Act, signed into law last July, aims to make it easier to break up large financial institutions instead of bailing them out.

Moody's currently rates Bank of America Aa3, Citigroup A1 and Wells Fargo Aa2. Those ratings are between three and five notches higher than where they would be without government backing.

But the banks won't lose all of that ratings cushion. Moody's said Citigroup and Bank of America's improving financial strength may temper the size of any rating cuts. The rating agency also says banks are unlikely to lose all federal government support.

The review of the banks' credit ratings may take up to three months. That's the standard amount of time for a ratings review, said Abbas Qasim, a Moody's spokesman.

A downgrade would likely raise the banks' borrowing costs.

In total, eight banks have higher ratings from Moody's on the assumption of government backing. The others are Bank of New York Mellon Corp., JPMorgan Chase & Co. Goldman Sachs Group Inc., Morgan Stanley and State Street Corp. Moody's said it's evaluating its assumption of federal backing for all of them.

The rating agency signaled a year ago that new federal rules, which became Dodd-Frank, could mean the end of banks being too big to fail.