Following the limiting regulatory changes facing banks following the most recent financial crisis and government bailout, Moody’s Investors Service is presently weighing the merits of downgrading banks as successful Goldman Sachs Group Inc (NYSE:GS) and JPMorgan Chase & Co (NYSE:JPM). The idea that the U.S. government may fail to prop up these creditors in the event of another crisis, has Moody’s debating whether or not they can in good conscience consider these and other institutions “safe as houses” as they have been viewed in the past.

Moody's Warns Of Downgrading Top U.S. Banks

Morgan Stanley and Wells Fargo also may be downgraded: Moody’s

Morgan Stanley (NYSE:MS) and Wells Fargo & Co (NYSE:WFC) also may be downgraded, according to a report that was released yesterday by Moody’s Corporation (NYSE:MCO). Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) are presently under review, though it’s possible that those two could be upgraded, as unlikely as that many sound.

Both Wells Fargo’s  and JPMorgan’s debt is currently rated A2, the sixth-highest of 10 investment grade levels that Moody’s Corporation (NYSE:MCO) uses. Goldman is one below that at A3. Morgan Stanley is considered Baa1 while Citigroup and Bank of America are only two levels above “junk” at Baa2.

Moody’s and Standard and Poor’s are looking at downgrading the aforementioned banks

The federal government is now in possession of tools to wind down banks rather than face another bailout using taxpayers dollars. Debtholders can now be faced to eat their losses or convert their stakes to equity and consequently Moody’s and Standard and Poor’s are looking at downgrading the aforementioned banks by as many as two levels.

“In the past year, we have seen progress towards establishing a framework to credibly resolve these large systemically important banks,” Robert Young, a Moody’s Corporation (NYSE:MCO) managing director, said in the report.

Bank of America and New York-based Citigroup Inc (NYSE:C) may avoid cuts or could even be upgraded because of their improving financial performance according to sources in the know.

In the event of downgrades, both Goldman Sachs Group Inc (NYSE:GS) and JPMorgan Chase & Co (NYSE:JPM) would be forced to add to their existing collateral levels—$1 billion in extra collateral in the event of a one-step cut and $3.4 billion after a two-level reduction for JPMorgan Chase & Co (NYSE:JPM), where Goldman Sachs Group Inc (NYSE:GS) may have to post $1.26 billion extra collateral or termination payments if its credit ratings are cut one level and $2.17 in the event of a two level downgrade.