Moody's Investors Service said it might cut the credit ratings of major U.S. bank holding companies, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., citing reduced chances that the government will fully bail out bond investors if the companies run into financial distress.
The announcement shows that regulators are making progress toward convincing financial markets that big banks may not be too big to fail.
Moody's said in the announcement that it may also downgrade bonds of Wells Fargo & Co., and Morgan Stanley. The bonds of Bank of America Corp. and Citigroup Inc. may be downgraded for the same reasons, but they may also be upgraded because the banks' operations are improving.
Ratings downgrades can increase a bank's borrowing costs and force it to post more collateral in derivative trades, weighing on its profitability and draining its cash.
Over the last year, regulators have proposed forcing debt investors to rescue tottering banks, instead of taxpayers — when a bank starts to falter, some of its debt would be turned into equity under the proposed rules. Regulators at the Federal Deposit Insurance Corp. and the Federal Reserve are expected this fall to announce minimum amounts of bond financing for bank holding companies to ensure the so-called resolution plans would work.
With bondholders potentially bearing more of the burden of rescuing banks, the banks' debt may be less creditworthy, Moody's said. Two more banks, Bank of New York Mellon Corp. and State Street Corp., had already been placed under review for downgrade by Moody's because of its reassessment of likely government support for bondholders.
The ratings agency generally announces results of its formal reviews of ratings within 90 days.
Moody's added that even if the proposed new rules increase the chance of banks defaulting, they may also decrease the losses to investors when the bank defaults.
A clear plan for handling tottering banks means that the companies could get back on their feet faster and lose less business, making them better able to ultimate repay creditors, Moody's senior vice president David Fanger said in an interview.
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