JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are among eight large U.S. banks that had credit grades cut one level by Standard & Poor’s on the prospect that the U.S. government is less likely to provide aid in a crisis.
After signaling the move last month, S&P lowered its long-term issuer credit, senior unsecured, and nondeferrable subordinated debt ratings, according to a statement Wednesday. Firms affected also include Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp. and State Street Corp.
“We now consider the likelihood that the U.S. government would provide extraordinary support to its banking system to be ‘uncertain’ and are removing the uplift based on government support from our ratings,” S&P said in the statement. It had put the companies on negative credit watch Nov. 2 as it reviewed regulatory changes.
The Federal Reserve approved a rule in October that will require large U.S. banks to hold a stockpile of debt that can be converted into equity if they falter -- a key part of regulators’ efforts to avoid another financial crisis. If U.S. companies were to fail, investors in their stock would lose everything, but the debt would be converted into equity in a new, reconstituted bank.
Wells Fargo, Bank of New York Mellon and State Street had their long-term issuer credit ratings cut to A from A+. JPMorgan’s was lowered to A- from A. Citigroup, Bank of America, Goldman Sachs and Morgan Stanley were reduced to BBB+ from A-.
Because creditors would end up providing support under the Fed’s plan, S&P has said it’s taking no negative actions on the eight banks’ operating entities. In some cases, the rules may even have a positive impact on the companies’ “core and highly strategic operating subsidiaries,” S&P said. It has placed such units at Bank of America, Citigroup, Morgan Stanley, and Goldman Sachs on positive credit watch.
Representatives for the banks declined to comment.
Ratings cuts typically raise borrowing costs and force banks to increase collateral. Still, the impacts aren’t always clear. When Moody’s Investors Service downgraded 15 of the largest banks in June 2012, the stocks and bonds of the firms rose on relief that the cuts weren’t more severe.
Bonds of U.S. banks have returned 2.5 percent in 2015, compared with 5.1 percent in the corresponding period last year, Bank of America Merrill Lynch index data show. The debt has gained 1.6 percent since the end of August, compared with 1.2 percent for dollar-denominated investment-grade corporates.
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