Moody's is threatening multi-notch downgrades for Bank of America, Morgan Stanley, and Citigroup. Noticeably absent from this CNBC report of Moody's threats of financial downgrades are JP Morgan and Goldman Sachs- which have been included by Moody's as likely to be downgraded. Coincidence?
Some of Wall Street’s biggest banks are bracing for fallout from a possible cut in their credit ratings.
Moody’s Investors Service, one of the two big ratings agencies, has said it will decide in mid-May whether to lower its ratings for 17 global financial companies. Morgan Stanley , which was hit hard in the financial crisis, appears to be the most vulnerable.
Moody’s is threatening to cut the bank’s ratings by three notches, to a level that would be well below the rating of a rival like JPMorgan Chase.
Bank of America and Citigroup may also fall to the same level as Morgan Stanley, but those two are helped by having higher-rated subsidiaries.
Credit ratings are particularly important for financial companies, which greatly depend on the confidence of their creditors and the companies they trade with. A high credit rating enables banks to put up less money, which they can borrow cheaply, while a lower credit rating can mean they have to put up more money and perhaps pay more for their loans.
The three banks that stand to be the most affected by a ratings downgrade have already said that they would have to put up billions of dollars more in collateral to back trading contracts.
Having a substantially lower credit rating than rivals, however, could do much wider damage over time. It could affect billions of dollars in trading contracts that are an important business for Wall Street. Many of these contracts demand that the company on the other side of a trade have a high enough credit rating.