Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among banks whose debt ratings may be cut by Moody’s Investors Service as it examines whether the U.S. would be less likely to ensure creditors are repaid in a crisis.
Morgan Stanley and Wells Fargo & Co. also may be downgraded, Moody’s said last week in a report. Citigroup Inc. and Bank of America Corp. are under review along with Bank of New York Mellon Corp. and State Street Corp.
Moody’s and Standard & Poor’s have said downgrades may be needed because the federal government has new tools to wind down banks instead of rescuing them with taxpayer money. Those plans can include forcing debtholders to incur losses or convert stakes to equity. The policies also may have an impact on ratings of the companies’ deposit-taking subsidiaries.
“In the past year, we have seen progress towards establishing a framework to credibly resolve these large systemically important banks,” Robert Young, a Moody’s managing director, said in the report.
The reviews may lead to a one- or two-step downgrade at the banks depending on the level of government support built in to the ratings, said David Fanger, a senior banking analyst at Moody’s. Bank of America and New York-based Citigroup may avoid cuts or be upgraded because of their improving financial performance, Fanger said.
The debt of JPMorgan and Wells Fargo is rated A2, the sixth-highest of Moody’s 10 investment-grade levels. Goldman Sachs is one step below that at A3, followed by Morgan Stanley at Baa1. Citigroup and Bank of America are rated Baa2, two rungs above junk.
JPMorgan may have to post $1 billion in extra collateral in the event of a one-step cut and $3.4 billion after a two-level reduction, the New York-based lender said. Goldman Sachs may have to post $1.26 billion extra collateral or termination payments if its credit ratings are cut one level and $2.17 billion for a two-step drop, the New York-based firm said.
The Federal Deposit Insurance Corp.’s favored approach for winding down banks in a crisis, known as single-point-of-entry, may lead to higher recoveries for bondholders by keeping operating units open, Fanger said. Firms may be required to hold a minimum amount of debt, which also could help recoveries because losses would be spread among more investors.
There would be “more bondholders to share the burden,” Fanger said.