The era of extraordinary government support for U.S. mega banks in crisis is ending, Moody's says. Welcome to the era of just ordinary government support.
Moody's move earlier today to downgrade the debt of three of the country's four largest banks shouldn't be seen as a prediction that any are likely to be cut off in the event of a crisis. Instead, it's a testament to the durability of the view that, in a crisis, the government will still come to the rescue.
"Moody's continues to see the probability of support for highly interconnected, systemically important institutions as very high, although that probability is lower than it was during the financial crisis."
The downgraded companies disagreed with rating agency's conclusion that they are less creditworthy than in the recent past.
Moody's specific changes to the banks' ratings differed in their details. It cut Bank of America Corp's long term credit rating two notches, from A2 to Baa1, and reduced its short term rating to P2 from P1. It lowered Wells Fargo & Co's long term rating to A2 from A1. And it left Citigroup Inc's long-term rating of A3 unchanged, though its short-term rating fell to Prime 1 to Prime 2.
The move follows Moody's June 2 decision to reevaluate the likelihood of sovereign support for the largest banks. Political, legal, and regulatory obstacles to future bailouts have complicated any future possible rescue, but the downgrade does not signify that Moody's believes the rescue of a failing bank is out of the question, the company noted.
Both B of A and Citi issued statements disagreeing with Moody's evaluation. Both argued that the downgrade would have little practical significance, though they took different tacks in addressing the awkward issue of a continued systemic importance ratings subsidy.
"In terms of factors within the control of Bank of America, Moody's states clearly that we have made significant progress in improving our capital and liquidity positions, shedding legacy and noncore assets, and managing risk," Bank of America wrote. The ratings move will have little immediate effect on the company's borrowing, B of A said: "We have been managing our liquidity carefully and we have prefunded our planned borrowing needs for the year."
Citigroup also argued that it had more than enough capital on hand to ensure its safety. But unlike B of A, it did not acknowledge the ratings agency's contention that an implicit government safety net played a role in supporting its credit rating.
Moody's action "does not accurately reflect the significant progress Citi has made since Moody's last rated Citi more than two-and-a-half years ago," the company's statement said. "Regardless, we believe that less than 1% of Citi's funding will be affected by the Moody's decision and the downgrade will not affect the short-term and long-term funding of our bank vehicles."
The announcements delivered immediate jolts to all three companies' stock, with Bank of America falling nearly 5%, Citi dropping 3%, and Wells 2%. But prices almost immediately bounced back. As of mid-afternoon, B of A was down a little over 3%, Citi was nearly flat, and Wells was up 1%.
The Moody's announcement is in keeping with the outlook of other ratings agencies. In July, Standard & Poor's released a paper arguing that a willingness to stand behind large banks was a hallmark of advanced economies.
"Time and time again, the U.S. government has found ways — many times reluctantly — to contain systemic risk and limit economic fallout when large financial institutions are on the brink of failure," said S&P analyst Rodrigo Quintanilla at the time.
