Standard and Poor’s Rating Services announced that it was downgrading the credit ratings for several of the country’s biggest banks. S&P dropped ratings for Bank of America (BAC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), and Wells Fargo & Co. (WFC).
New Criteria in Rating Banks
All told, S&P changed their ratings for 37 financial institutions after changes made to its rating criteria. The changes were meant to reflect the increasing connectivity of the global economy, most likely a response to the European debt crisis and potential exposure of US banks involved there. The ratings downgrades for some of the biggest banks in America were hotly contested by the institutions. “We completely disagree with S&P’s change to Citigroup Inc.’s holding company long-term and short-term ratings,” said Jon Diat, a spokesman for Citigroup, in an e-mailed statement. “Less than 1 percent of Citi’s funding will be affected by the S&P revision.” Morgan Stanley, meanwhile, claimed that costs would increase as over-the-counter derivatives counterparties could demand $1.29 billion of collateral or termination payments from the bank as well as a new $323 million posting cost that will have to be ponied up to clearinghouses and exchanges. JP Morgan made similar claims, claiming it would need another $1.5 billion in collateral against derivatives and pay extra for contract terminations.
However, others disagreed, stating that the downgrades would have a minimal effect. “I don’t think moving from single A to single A- has much of an economic impact on anyone,” said David Hilder, a New York-based analyst at Susquehanna Financial Group. “Those ratings are at a high level compared to the whole spectrum of ratings and are still well into the territory of investment grade.”
Bank of America Takes Another Hit
Bank of America has been an embattled company for some time now, with serious questions arising about their ability to withstand another economic downturn in the United States and their exposure to European sovereign debt. As another series of stress tests approaches in January, the bank recently stated in a regulatory filing that credit downgrades “could likely have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical.” Now, Bank of America’s battered shares continue to suffer as the company appears poised to fail the upcoming, more-rigorous stress test. The cost of credit default swaps on the bank increased 16.9 basis points to 478.8 to reflect the increasing potential of the bank defaulting on its loans.
Upgrades as Well
The news was not all bad, though, as some financial institutions were actually upgraded because of the new criteria. Bank of China Ltd. (BACHF), China Construction Bank Corp. (CICHY), and Bank of New York Mellon (BK), were among those institutions receiving an upgrade.