Moodys Downgrades Major U.S. Banks' Ratings After U.S. Sovereign Credit Cut

Moodys has recently downgraded the deposit ratings of several major U.S. banks, including Bank of America, JPMorgan Chase, and Wells Fargo. This action follows the agency's decision to lower the U.S. sovereign credit rating from its highest level to Aa1, citing persistent budget deficits and a lack of improvement in fiscal management by successive U.S. governments and Congress. The long-term deposit ratings of these banks' subsidiaries were lowered by one notch to Aa2, the third-highest rating by Moodys. Additionally, the senior unsecured debt ratings of Bank of America and Bank of New York Mellon's subsidiaries were reduced from Aa1 to Aa2. The long-term counterparty risk ratings of these banks' subsidiaries were also downgraded to Aa2.

This latest move by Moodys is a direct consequence of the agency's decision to lower the U.S. sovereign credit rating. The ripple effects of this downgrade will impact companies, investors, and consumers who lend to banks through deposits, derivative transactions, or the purchase of unsecured debt from bank subsidiaries. Moodys noted that the U.S. government has historically provided some level of support for these "too big to fail" entities. However, the downgrade of the U.S. government's rating indicates a reduced capacity to support high-rated debt. Consequently, Moodys has removed the "one-notch upgrade" benefit that was previously included in the banks' ratings due to government support.

Despite this, certain debt or business ratings of some major U.S. banks will temporarily retain this government support benefit. The long-term senior unsecured debt ratings and issuer ratings of JPMorgan Chase and Wells Fargo, as well as the counterparty risk ratings and assessments of some Morgan Stanley subsidiaries, currently still include the government support factor. This temporary retention of the government support benefit is likely due to the ongoing importance of these banks to the U.S. economy and the potential impact of a further downgrade on financial stability.

The downgrade of these banks' ratings is a significant development in the U.S. financial sector. It highlights the potential risks associated with the U.S. government's fiscal management and the impact of these risks on the broader economy. The downgrade also underscores the importance of government support for these "too big to fail" entities and the potential consequences of a reduction in this support. As the U.S. government continues to grapple with budget deficits and fiscal management, the financial sector will likely face further challenges and uncertainties. It remains to be seen how these banks will respond to the downgrade and what steps they will take to mitigate the potential risks associated with it.