Tags: BofA | Billion | Hit | Downgrade

BofA: Ratings Downgrade Could Cost the Bank Billions

Friday, 04 May 2012 09:42 AM

 

Share:
  Comment  |
   Contact Us  |
  Print  
|  A   A  
  Copy Shortlink

Bank of America Corp., the lender that has bought back debt to strengthen its balance sheet, said credit downgrades in a hypothetical scenario may trigger demands for about $6.2 billion in collateral.

A two-level downgrade of long-term senior debt ratings would have prompted the bank to post about $5.1 billion of collateral tied to derivatives contracts and other trading agreements as of March 31, the Charlotte, North Carolina-based firm said yesterday in a regulatory filing. It would have had to post an additional $1.1 billion of collateral if trading partners opted to tear up contracts in a two-level cut.

Moody’s Investors Service, which is reviewing banks and securities firms with global capital markets operations, has said it’s considering downgrades of lenders including Bank of America, ranked second by assets in the U.S. While ratings cuts typically raise borrowing costs and force banks to increase collateral, analysts have said the change was expected.

Bank of America may be cut by one grade to Baa2, the second-lowest investment-grade rating, Moody’s said on Feb. 16. Competitors such as New York-based Morgan Stanley may be cut as many as three levels, Moody’s said. The ratings company wrote that credit profiles of investment banks are weakening amid worsening government finances, economic uncertainty and higher funding costs.

‘Evolving Challenges’

“Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” Moody’s said in February. “These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness and opacity of risk, have diminished” the industry’s prospects, Moody’s said.

The three major ratings firms -- Moody’s, Standard & Poor’s and Fitch Ratings -- cut Bank of America’s credit grades last year. The figures in the lender’s hypothetical scenario apply to future downgrades by all three firms.

A one-level cut would have required the bank to post about $2.7 billion of collateral tied to derivatives contracts and other trading agreements and an additional $800 million tied to the termination of contracts, the firm said.


© Copyright 2014 Bloomberg News. All rights reserved.

Share:
  Comment  |
   Contact Us  |
  Print  
  Copy Shortlink
Around the Web

Join the Newsmax Community
Please review Community Guidelines before posting a comment.
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
 
Email:
Country
Zip Code:
Privacy: We never share your email.
 

You May Also Like
Around the Web

Most Commented

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved