Why the Moody's downgrades of big banks may say more about Moody's than the banks
The risk of default remains fairly negligible; the same can't be said for Moody's brand risk in the wake of its misses in 2008
Mike Dayoub, CFP®
Thanks for this, Steve. With their downgrade of the Spanish banks this week, I’d been looking for news and discussion of Moody’s ratings for US-based banks.
I wonder if the ratings are buoyed by an apparent too-big-to-fail precedent.
I also wonder if Moody’s ratings account for JPMorgan and Bank America shifting their derivatives portfolios to the more protected banking divisions. http://preview.tinyurl.com/7jvhrl4
Can you share any insight on that? I’d be grateful.
Steve Huxley
Mike –
Good questions. Moody’s 57 page report goes into why they did what they did (http://www.riabiz.com/a/14098811#comment-14094819). They state “Our view on support considers efforts by policymakers globally to create resolution and bail-in regimes that allow for more flexible and limited support in a stress scenario.” This suggests they consider government support when creating their ratings but Moody’s is uncertain if the politicians will provide the same level of support they did in 2008 and 2009.
The report also supports your conjecture that the banks themselves are factoring this into their decisions by changing their business models: “Some are implementing business strategy changes intended to increase earnings from more stable activities, and liquidity and capital positions have consequently improved. These transformations are ongoing, and their success has yet to be tested.”
I suspect the election will tend to dominate what happens in the markets and it should be interesting to see if the ratings change next year if the economy turns for the better based on the national mood.
Thanks for engaging in the discussion!
