S&P Says Government Won’t Bail Out Big Banks

Standard & Poor’s said Tuesday that most of the biggest U.S. banks are still “too big to fail.” The credit rating agency said that the U.S. government is unlikely to bail out big banks in the event of another crisis. That means the holding company creditors have to bear losses in the case of a collapse. S&P recently upgraded the U.S. credit outlook to stable from negative.

S&P Says Government Won't Bail Out Big Banks

Since the 2008 and 2009 bank rescues, investors have assumed that the government won’t let the banks collapse. Senators David Vitter and Sherrod Brown presented a bill in April, arguing that the Dodd-Frank Act hasn’t solved the problem of “too big to fail.” Many people have raised concerns that some of the biggest banks are still deriving unfair advantages due to their size. In response, the regulators and legislators are planning to put new restrictions on banking giants like Citigroup Inc (NYSE:C), Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM).

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The banking industry already has the support of the Federal Deposit Insurance Corp. and many senior Treasury officials. Banks have argued that the new system to resolve the collapsing financial groups means no bank will be bailed out. S&P said that the new proposal has made it unlikely that big banks will be bailed out at the holding company level. The rating agency changed the JPMorgan Chase & Co. (NYSE:JPM)’s outlook to negative, putting it into the category of other seven largest banks.

Regulators have proposed to impose a minimum threshold for long-term debt at the holding company level. In times of crisis, this long-term debt can be converted into equity to recapitalize the financial group. The Federal Reserve and FDIC are working on the “orderly liquidation authority” under the Dodd-Frank Act to avoid a Lehman Brothers-like collapse or an  American International Group Inc (NYSE:AIG) -like bailout.

However, S&P managing director Craig Parmelee thinks that the U.S. government would still bail out the operating subsidiaries of these banks. JPMorgan Chase & Co. (NYSE:JPM) shares were down 0.24 percent to $53.37 at 12:10 PM EDT.