SEATTLE • JPMorgan Chase, Bank of America and Citigroup are among eight large United States banks that may have credit grades cut by Standard & Poor's on the prospect that the US government is less likely to provide aid in a crisis.
The companies - along with Wells Fargo, Goldman Sachs Group, Morgan Stanley, Bank of New York Mellon and State Street - had senior unsecured and non-deferrable subordinated debt ratings placed on negative credit watch, S&P said on Monday in a statement. S&P said it expects to resolve the credit reviews by early next month.
The Federal Reserve approved a rule last week that will require large US banks to hold a stockpile of debt that can be converted into equity if they falter. The rule on total loss-absorbing capacity is a key part of regulators' efforts to avoid another financial crisis.
"The action reflects our belief that US regulators have made further progress and provided more clarity in enhancing their plans for resolving systemically important institutions," S&P said in its statement. That lowers "the probability that the US government would provide extraordinary support to these institutions to enable them to remain viable".
Bonds of US banks have gained 2.03 per cent this year, compared with a 4.7 per cent return in the corresponding period last year, Bank of America Merrill Lynch index data showed. The debt has gained 1.08 per cent since the end of August, compared with 0.9 per cent for dollar-denominated investment-grade corporates.
HELPING HAND UNLIKELY
The action reflects our belief that US regulators have made further progress and provided more clarity in enhancing their plans for resolving systemically important institutions.
STANDARD & POOR'S, on the plans of the US government
Because the bank's creditors would end up providing support under the Fed's rule, S&P said it is taking no negative actions on the eight banks' operating entities.
The ratings firm placed "core and highly strategic operating subsidiaries" of Bank of America, Citigroup, Goldman Sachs and Morgan Stanley on credit watch positive. That review includes issuer credit ratings and senior unsecured debt ratings.
"With this new rule, fixed-income investors would consider asking for higher yield to hold bank capital debt because of the larger downside with the US government backing off," said banking analyst Hou Wei from Sanford C. Bernstein in Hong Kong. "For equity investors in those banks, they may need to ask for higher returns as well, because their holdings could be diluted if bank capital debt is forced to be converted into equity."
Ratings cuts typically raise borrowing costs and force banks to increase collateral. Still, the impacts are not always clear. Spokesmen for Bank of America, Citigroup, Goldman Sachs and Morgan Stanley declined to comment on S&P's announcement. Representatives of BNY Mellon, JPMorgan, State Street and Wells Fargo did not immediately return messages.