Moody's Warns Of Upcoming Bank Downgrades If Dodd Bill Passes, BofA, Citi And Wells At Greatest Risk
Moody's says that if the Dodd bill passes in the substantially proposed form, the rating agency will likely need to cut various banks due to the elimination of assumptions about systemic support as some from a resolution authority is introduced. The banks that would suffer the most are: Bank of America- 4 notches from the current HoldCo Sr rating of A2, Citigroup and Wells Fargo both at 3, from A3 and A1, respectively, Morgan Stanley two notches lower from A2, and one notch for each of the following: BoNY (Aa2), JPM (Aa3), Goldman (A1), SunTrust (Baa1), and Regions Financial (Baa3).
As Moody's notes:
Broadly speaking, our response to the Dodd Bill is similar to our response to the Frank Bill. Senator Dodd’s proposal could lead to higher capital requirements, better liquidity, less concentrations and curtailment of risky activities -- all positives for U.S. banks’ unsupported Bank Financial Strength Ratings (BFSRs). Unlike the Frank Bill, however, the Dodd Bill mandates that more derivative trades be done through exchanges, allowing customers to observe market pricing. Although such an arrangement promotes systemic stability, the greater degree of transparency will likely lead to lower spread margins in a product that is a sizable contributor to investment bank earnings for a select few U.S. banks.
For debt and deposit ratings, however, the Dodd Bill seeks to end “too-big-to-fail” by creating a legal framework that could allow for the resolution of a failing large bank holding company (as well as a large insurance company, securities firm, or other financial company). The legislation’s objective is to resolve such a company without cost to taxpayers, but also with less disruption to the markets and the economy than would likely be the case if such a firm was subject to traditional bankruptcy proceedings. However, the market, particularly given the complexity and interconnectedness of the banks that are the target of this bill, does not isolate concern within a single institution. Therefore, the practical concern of risk contagion by investors will present practical barriers to the ability of the regulators to withhold support while also maintaining market stability that is fundamental to the health of the economy.
A key component of the Dodd Bill is that it attempts to keep the systemically important functions of the company viable and in operation while exposing unsecured creditors of the failed company to losses in accordance with their priority of claim. To the extent that such resolution authority were enacted into law, and to the further extent that we found it to be credible and likely to be used, we would need to reevaluate our systemic support assumptions that currently provide lift to the deposit and debt ratings for a number of U.S. banking companies (as highlighted in the following table).
Full Moody's report.