Moody's Investors Service lowered the credit ratings of 15 major banks Thursday, including Bank of America, JPMorgan Chase and Goldman Sachs, saying their long-term prospects for profitability and growth are shrinking.
The ratings agency said it was especially concerned about banks with significant financial markets businesses because those markets have become so volatile. Some of the largest European banks were also downgraded, including Barclays, Deutsche Bank and HSBC.
These banks were vulnerable to "outsized losses," Moody's global banking managing director Greg Bauer said in a statement. These behemoth banks are all major players in the global stock and bond markets, which have become extremely volatile. However, Bauer pointed out that some of the banks, like JPMorgan Chase and HSBC, have reliable buffers in more stable businesses, which could act as "shock absorbers" during a crisis.
The downgrades reflect Moody's concern over the ability of the banks to repay their debts during times of crisis. Moody's had said in February that it was considering downgrading the credit ratings of major banks in the U.S. and in Europe.
A downgrade usually means a bank will have to pay more for its debt. Investors demand higher interest for riskier debt, which is what the downgrades represent. However, with interest rates already at rock-bottom levels, the downgrades may not affect the cost of funding for the banks that much.
The stock market has also priced-in any negative impact from the ratings downgrades, according to Bert Ely, a banking consultant in the Washington, D.C., area. "They've been telegraphing this thing for months," Ely said.
In a sign that investors were taking the news in stride, stocks of major U.S. banks rose in after-hours electronic trading. Moody's made its announcement after regular stock trading had closed. Morgan Stanley rose the most, 3.3 percent, gaining 45 cents to $14.41. JPMorgan Chase rose 41 cents to $35.92 and Bank of America rose 12 cents to $7.94.
Citigroup said in a statement that it "strongly disagrees" with Moody's assessment. Citi said it doesn't believe the downgrade will impact the bank's funding costs because the ratings actions have already been expected by the market, and its business partners have included them in their analyses. Morgan Stanley also disagreed with Moody's action.
The downgrades come at a time of great uncertainty in the global economy. Europe's currency union is under threat, the U.S. economy is slowing and the red-hot economies of India, Brazil and China are cooling. Financial markets have also been extremely volatile.