Standard & Poor’s (S&P) will publish new ratings for the world’s 30 biggest banks at the end of this month after adjusting its methodology based in part on how the institutions have responded to crises in the US and Europe.
S&P, the world’s biggest credit-rating company, will reveal its adjusted grades for all banks by the end of the year, Craig Parmelee, a managing director in its financial services group, said yesterday at a briefing for reporters in New York.
About 15 percent of long-term grades will fall one level, fewer than 5 percent will drop at least two levels and 20 percent will be upgraded, S&P said in a Nov. 1 statement.
The ratings firm has been changing the way it looks at debt after its faulty grades contributed to the credit-market seizure that brought down Lehman Brothers Holdings Inc and Bear Stearns Cos.
Bond investors are watching the process, as the new ratings affect banks’ derivative contracts and funding costs, according to Adam Steer, an analyst who follows the industry at Brookfield Investment Management Inc.
“The markets have been bracing for these changes,” Steer said in a telephone interview. “There’s going to be an impact from any ratings move, whether up or down.”
S&P has a “negative outlook” for the credit ratings of Bank of America Corp, Morgan Stanley, Goldman Sachs Group Inc, Citigroup Inc and UniCredit SpA. S&P plans to inform the banks of their new ratings about a day before they are released to the public, Parmelee said.
Downgrades may be costly for banks. Bank of America, the second-biggest US lender by assets, said in a regulatory filing this month that it might have to post US$5.1 billion of additional collateral and termination payments on its trades were it to be downgraded one level by the ratings companies.
A one-step reduction may cost Morgan Stanley US$629 million, the New York-based bank said this month in a regulatory filing.
S&P, a unit of New York-based McGraw-Hill Cos, said it started to review the bank methodology in December 2008. When Lehman Brothers failed that September, S&P had the bank rated “A.” Bear Stearns was rated “A” when it took an emergency loan from the US Federal Reserve in March 2008.
“The rating agencies have been one of the great lagging indicators,” Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co, said in an interview. “The change in methodology is an acknowledgement of prior failure, which shouldn’t give us comfort that their new methodologies are any more effective.”
About 10 percent of financial companies with top short-term grades of “A-1+” or “A-1” will decline to “A-2,” S&P said in the statement. While downgrades would increase banks’ funding costs, they would not cut off their access to cash, said Marty Mosby, an analyst at Guggenheim Securities LLC.
“The banks in the US are really flush with deposits right now,” Mosby said in a telephone interview. “They’ve been able to pull back their dependence on wholesale funding.”
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