Moody’s Investors Service said it was not necessarily focusing on the red-hot issue of nonperforming loans when it downgraded some bank bond ratings and placed the ratings of another bank on review earlier this month.

“All anybody wants to talk about these days is asset quality, and asset quality isn’t what drives our ratings any more than capital is what drives our ratings,” said David Fanger, senior credit officer for the financial institutions group at Moody’s. “The asset quality by itself isn’t an issue if the institution has sufficient earnings to cover [those] problems.”

The overall earnings power of the U.S. banking system is “unprecedented,” said Mr. Fanger, whose agency has put many of the banking companies involved in big merger deals, such as Chase Manhattan Corp. and J.P. Morgan & Co., on review for possible upgrading and confirmed the A1 senior debt ratings of Firstar Corp. and U.S. Bancorp, two other companies that plan to merge.

Other banking companies, including Wells Fargo & Co. and Mellon Financial Corp., were upgraded this year because they have succeeded in diversifying their franchises while continuing to generate strong earnings, Mr. Fanger said. In some cases, though, diversifying lines of business has not proven as stable or as profitable an income source as gathering plain old deposits, he said.

In the last two weeks Moody’s has downgraded Riggs National Corp. of Washington and Zions Bancorp of Salt Lake City and put Wachovia Corp. of Winston-Salem, N.C., under review for a possible downgrading. Standard & Poor’s Corp. also downgraded Riggs.

Fitch Investors Service downgraded First Union Corp. Thursday, to A from A-plus. The restructuring program First Union announced in June would increase its reliance on more volatile wholesale capital markets activities to generate earnings, the agency said.

James Moss, director of Fitch’s U.S. banking group, said his agency may begin to see a “tipping” toward bank downgradings. Banks that adopted new ways to measure risk and manage loan portfolios during the 1990s have not seen a true test of these practices until now, he said.

“As much as people point to all these different strategies and concepts and techniques, risk for banks is still under loan portfolios, and that’s where a lot of change has taken place,” Mr. Moss said. “A lot of these developments have come into play since what we consider to be the last true, long, challenging environment for banks, which would have been 1988 to 1991.”

Moody’s cited Wachovia’s participation in the increasingly competitive credit card and riskier wholesale banking markets as the reason for reviewing its senior debt rating, currently at Aa3. Wachovia said in June that it would post $200 million of additional reserves, in part because of its participation in a syndicated loan that was turning sour.

Mr. Fanger said Wachovia “has traditionally been a very strong franchise but is under greater pressure these days and has been seeking to diversify in a number of different areas.” Moody’s does not believe these diversification efforts are “likely to generate as predictable [or] as stable an earnings stream as their core business does.”

In the case of Riggs, whose subordinated debt rating fell to Ba2 from Ba1, the agency cited increased spending on business initiatives, which has cut into the company’s core profitability.

Moody’s said it downgraded Zions to Baa1 from A3 to correct an upgrading it had made when the company was expected to merge with First Security Corp. This deal would have helped it expand its franchise into new markets and save money, the agency said.

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