Three of the top US banks are likely to start paying more to borrow money.
Moody’s Investors Service on Wednesday lowered its debt ratings for Bank of America (BofA), Wells Fargo and Citigroup. The ratings agency said it has become less likely that the US government would step in and prevent the three lenders from failing in a crisis.
“The probability of government support for the banks is less now than during the financial crisis,” said David Fanger, senior vice president at Moody’s.
The downgrades were widely expected after the ratings agency placed the three banks on review in June. The cuts also stem partly from new laws taking effect under the Dodd-Frank Wall Street Reform Act. The new law ended the possibility of the US government bailing out a large financial firm and created a process that would allow a financially troubled bank to fail and liquidate its assets.
BofA was hit worst. Moody’s downgraded its key long-term debt ratings two notches, to “Baa1” from “A2.” Wells Fargo & Co’s long-term debt rating fell one notch to “A2” from “A1”, while Citigroup Inc’s rating remained the same at “A3.” Moody’s did downgrade Citi’s short-term debt.
BofA’s ratings are the lowest among the three, but all three of the banks’ debt is still rated investment grade.
A downgrade is a warning to buyers of debt that the chance that they won’t get their money back has increased, however slightly. Downgrades usually lead to higher borrowing costs for the issuer because investors want more interest if they’re taking a bigger risk. Long-term debt includes bonds that come due in more than one year.
BofA’s stock tumbled most, 7.5 percent, to close at IS$6.38. The bank is already dealing with investors’ concerns over whether it has enough capital to deal with its financial losses and over lawsuits related to poorly written mortgages of the past.
In the first half of the year the bank paid out US$12.7 billion to settle claims from investors that the bank sold them securities backed by faulty mortgages.
Moody’s said although BofA has ample resources to absorb additional losses, it was concerned that any deterioration in the economy or negative court rulings on the mortgage litigation could have a “significant impact on [the bank’s] capital position.”
In a statement, the bank said: “While we disagree with their conclusions and we believe our ratings should be higher, to minimize any potential impact of this decision on our business, we have been managing our liquidity carefully and we have prefunded our planned borrowing needs for the year.”
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