S&P Cuts Credit Rating of Top Banks after Fed’s New Rule

S&P cuts large US banks’ credit ratings

Eight of the largest US banks (XLF) have seen their credit ratings cut one level by Standard & Poor’s (or S&P) on the basis that the US government will provide less aid to them in case of a crisis. J.P. Morgan (JPM), Bank of America (BAC), and Citigroup are among these eight large banks whose ratings have been downgraded.

Wells Fargo (WFC), Goldman Sachs (GS), Bank of New York Mellon, State Street, and Morgan Stanley are also on this list of banks that have faced credit rating cuts. For Wells Fargo, Bank of New York Mellon, and State Street, S&P’s long-term issuer rating was cut to A, while J.P. Morgan’s rating was lowered to A- from A. Credit ratings for the remaining four banks—Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley—were cut to BBB+ from A-.

S&P Cuts Credit Rating of Top Banks after Fed’s New Rule

Last week, the Federal Reserve proposed a new rule for the “too big to fail” banks. Under this rule, these banks will be required to include long-term debt in their respective holding companies’ balance sheets. This debt can be converted into equity in case of a failure. This would help infuse the necessary capital during a crisis.

This rule on total loss-absorbing capacity (or TLAC) was devised to avoid another financial crisis like the one in 2008. US banks may have to raise as much as $120 billion in debt to adhere to the new Fed rule. S&P put these banks at “credit watch negative” as it was reviewing regulatory changes.

S&P is of the view that such rules would lower the probability of the government providing support to these institutions in case of another crisis. This makes them more risky. Rating cuts also lead to higher borrowing costs and thereby force banks to increase collateral.