S&P downgrades raft of US Banks
Eight of the biggest US banks have been downgraded by Standard & Poor’s, as the credit rating agency judged that the likelihood of federal government support in a future crisis had dimmed.
Bank of America, JPMorgan Chase, Citigroup and Wells Fargo were among the banks affected by the downgrade, taken as the Federal Reserve sought to finalise rules next year governing the amounts and type of capital banks must hold to withstand a huge shock to the system.
Morgan Stanley, Goldman Sachs, Bank of New York Mellon and State Street — the other four groups designated as globally systemically important banks, or GSIBs — were also downgraded, a shift signalled by S&P last month. All eight holding companies have been docked one notch, while the operating companies are unaffected.
In October the Fed projected that the six largest banks faced a $120bn capital shortfall under new rules that would require the institutions to hold big buffers of debt that could be converted into equity in a crisis. Banks are expected to hold total loss absorbing capacity — TLAC — of at least 18 per cent of their risk-weighted assets.
Since the financial crisis of 2008-2009 regulators have launched a succession of measures designed to ensure that taxpayers will not be burdened again in the event of another Lehman-like crisis, forcing banks to hold more capital and liquid assets while limiting the amounts they can return to shareholders through buybacks and dividends.
Bank | Previous ratings | Current ratings |
---|---|---|
Bank of America | A- | BBB+ |
BNY Mellon | A+ | A |
Citigroup | A- | BBB+ |
Goldman Sachs | A- | BBB+ |
JPMorgan | A | A- |
Morgan Stanley | A- | BBB+ |
State Street | A+ | A |
Wells Fargo | A+ | A |
Source: Standard & Poor’s |
“We now consider the likelihood that the US government would provide extraordinary support to its banking system to be ‘uncertain’ and are removing the uplift based on government support from our ratings,” said Stuart Plesser and Devi Aurora, analysts with S&P.
The long-term issuer ratings of Bank of America, Citigroup, Morgan Stanley and Goldman Sachs were lowered from A minus to triple B plus. JPMorgan was downgraded from A to A minus, while BNY Mellon, State Street and Wells Fargo were cut from A plus to A.
The Fed’s TLAC rules require banks to maintain minimum levels of capital and long-term debt at the holding company level, which can be “bailed in” to absorb potential losses from subsidiaries and to recapitalise the operating companies. This process is designed to keep operating companies ticking over while equity investors lose everything and creditors take some pain.
S&P noted that it remained unsure which debt instruments would ultimately count as TLAC-eligible, but said it was satisfied that the effect of the changes would be to reduce the chances of another round of state-led bailouts.
Credit strategists at Bank of America Merrill Lynch expect banks to aim to comply with the new capital buffers from 2019, projecting about $50bn in new debt issuance next year to address roughly two-fifths of the shortfalls.
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