Much like consumers rely on their credit score, banks and other businesses rely on their credit rating in order to receive cheaper lending options and other financial perks. Unfortunately, Moody’s Corporation (NYSE:MCO) recently announced a whole string of bank credit downgrades which will likely put the downgraded banks in an even worse position than they are already in.
Among banks in the US, Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C) were all victims of Moody’s downgrade report.
In the report, Moody’s does admit that while these downgraded banks had cleaned up part of their balance sheets, their core business operations still have flaws. According to The New York Times Company (NYSE:NYT), these downgrades will ultimately lead to a new “sober” reality for Wall Street.
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Bank of America and Citigroup both got their credit rating cut to Baa2, just two ratings above junk status. Morgan Stanley was downgraded to a Baa1 rating which is only one rating above BofA and Citigroup. These downgrades will hurt these banks over the long run in a time when the banking sector’s valuations are down near historical lows.
The ridiculous part of all of this is now that these banks have had their credit ratings downgraded, it will be even harder to fix the issues that Moody’s highlighted. In addition, after JPMorgan reported that huge trading loss last month, the US government may not slap a new round of regulations on the banks further hurting their long term prospects.
US banks have a very dark future ahead if the government increases regulation. Many CEOs including JP Morgan’s Jamie Dimon have repeatedly told the government that increase regulations on the banking industry will put a lot of extra stress during an uncertain time.
The way I see it, if the government does end up going through with new regulations, the chances are very high that America’s banking sector will need some form of support again. This could lead to another dark period like 2008 where a number of banking institutions ceased to exist such as Lehman Brothers, Bear Sterns, Washington Mutual, Merrill Lynch, etc.
The bottom line here is that these downgrades along with any new government requirements could have a devastating effect on US banks. As conditions continue to decline in Europe along with softening sentiment in the US and China, US banks will continue to see choppy waters ahead.
Disclosure: No positions