Moody’s cut its credit ratings on Wednesday on three large banks from United States of America (USA) – Bank of America, Citigroup and Wells Fargo – underscoring the challenges the sector still faces three years after the onset of the financial crisis, New York Times informs.
The downgrades were driven by Moody’s conclusion that the federal government was less likely to step in and provide support for a faltering big bank the way it did after the 2008 collapse of Lehman Brothers. Moody’s had put the banks on notice for a possible downgrade on June 2. The agency added that the government “is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled.”
Under the Dodd-Frank financial regulatory reform passed by Congress in 2010, financial institutions must file a so-called living will that lays out steps for an orderly liquidation in the event of a financial collapse. The goal is to avoid future government bailouts, as well as the kind of turmoil unleashed by Lehman’s unexpected bankruptcy.
“Now, having moved beyond the depths of the crisis, Moody’s believes there is an increased possibility that the government might allow a large financial institution to fail, taking the view that the contagion could be limited,” the firm said in a statement. Even so, Moody’s said it doubted whether a global financial institution could be liquidated “without a disruption of the marketplace and the broader economy.”
Shares of all three big banks fell sharply after the downgrade, but Bank of America dropped the most, falling 7.5 percent to USD 6.38 a share.
In addition to seeing the government as less likely to support Bank of America, if needed, Moody’s said that the company “remains exposed to potentially significant risks related to both the residential mortgage and home equity loans on its balance sheet, as well as to mortgages previously sold to investors.”
Investors are seeking to force Bank of America to pay billions of dollars for its alleged misdeeds during the height of the housing boom, especially the bubble-related excesses at Countrywide Financial, the subprime giant Bank of America acquired in 2008. Bank of America has reached settlements with some investors, but other holders of mortgage-backed securities assembled by Bank of America, Countrywide and Merrill Lynch, another subsidiary, are suing to recover multibillion-dollar losses.