Moody's Investors Service said Thursday that it was reviewing the ratings of Bank of America Corp. Citigroup Inc. and Wells Fargo & Co. for possible downgrades.
The three banks' current ratings are already in the middle of the investment-grade corporate credit ratings. And that's with a boost from Moody's assumption the federal government would prevent them from failing in a crisis. Moody's said Thursday that this "too big to fail" assumption may no longer be true.
In a statement accompanying the announcement, Moody's senior vice-president Sean Jones said the Dodd-Frank Act makes clear the government "does not want to bail out even large, systemically important banking groups." One aim of the Dodd-Frank Act, which was signed into law last July, is to make it easier to break up large financial institutions.
Moody's currently rates Bank of America's senior debt A2, Citigroup's A3 and Wells Fargo's A1. But the implied government backing pushes those ratings up from where they would be otherwise.
But the banks may not lose all of that ratings cushion. Moody's said Citigroup and Bank of America's improving financial strength may temper the size of any cuts to their ratings.
A downgrade would likely raise the banks' borrowing costs.
In total, eight banks have higher ratings from Moody's on the assumption of government backing. The others are JPMorgan Chase & Co. Goldman Sachs Group Inc., Morgan Stanley and State Street Corp. Moody's said it continues to evaluate its assumption of federal backing for all of them.
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