Banking on Ratings

Moody’s just downgraded a lot of banks. What does it mean?

Yesterday Moody’s Investor Services lowered the credit rating that they assign to 15 global banks. Large banks from the North America and Europe were all dropped one to three notches in Moody’s view. No one was dropped to junk bond status, and for the most part, the relative pecking order among banks was preserved: in the US, JP Morgan is still on top; in Europe it’s HSBC. So what changed?

These are all banks that have large investment banking operations. Banks that just focus on plain-vanilla banking—taking deposits and making loans—weren’t affected. But it’s a truism to say that large banks have significant exposure to the global capital markets. For large companies, the global capital markets is where they need to go to raise the money they need for operations and investment.

Moody’s says that the volatility of the markets has increased, and banks that are exposed to this need larger shock absorbers, either in the form of greater capital, earnings from diverse subsidiaries, or a strong risk-management culture.

Because no one was downgraded to junk and the ordering of the banks hasn’t changed, it’s tempting to say that Moody’s global downgrade is a bureaucratic exercise designed to limit their liability in case something really goes wrong—if, for example, Greece leaves the Euro and a large, global bank gets taken over by the government. Then Moody’s can say, “It wasn’t us! We warned you!”

While that’s true, buried in their 57-page report is this nugget: several banks still have legacy problems from the financial crisis that haven’t gone away—but most have cleaned up their balance sheets. The financial world may still be a volatile place, but some banks are clearly ports in a storm.

As always, with the ratings agencies, ignore the ratings themselves. Those are too political. Instead, focus on the report. That’s where any new news is.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350 • •

Leave a Reply

Your email address will not be published. Required fields are marked *