Moody's Bank Downgrade May Mean Higher Lending Rates

For the second time in a year, Moody's downgraded 15 global banks. The credit ratings agency downgraded five of the biggest U.S. banks on Thursday, and that may lead to higher rates for consumer and even tighter lending policies.

All 15 banks were downgraded in response to lower bank profitability unlike the last downgrade in November, which was based on Moody's change in methodology. Moody's and Standard & Poor's ratings help set the rates at which banks can borrow and therefore the rates they can extend to businesses and consumers.

On Friday morning, stocks, led by banks, rallied after the second-worst sell-off of the year on Thursday. Analysts viewed the rally as a sign that Moody's was off-base in lowering the credit ratings of the banks, which are much stronger financially than they were three years ago.

The Dow Jones Industrial average rose 0.49 percent to 12,635 at mid-morning while the S&P 500 advanced 0.41 percent to 1,331. The Nasdaq composite was up 0.52 percent to 2,874.

The stock prices of the five downgraded U.S. banks jumped on Friday morning.

Shares of Bank of America were up 0.64 percent to $7.87. JPMorgan Chase & Co. shares jumped 2.17 percent to $36.29. Shares of Goldman Sachs Group increased 0.64 percent to $94.50. Citigroup's stock was up 1.15 percent to $28.15 a share. Morgan Stanley shares increased over 2 percent to $14.25.

On Thursday, Moody's Global Banking Managing Director Greg Bauer said in a statement that the downgraded banks "have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities."

Citi released a rebuttal to the downgrade and said it "strongly disagrees with Moody's analysis of the banking industry and firmly believes its downgrade of Citi was arbitrary and completely unwarranted."

Morgan Stanley said it "believes the ratings still do not fully reflect the key strategic actions we have taken in recent years."

A spokesman for Bank of America declined to comment about the downgrade.

"In addition to strenghting our govenranace and risk management, Bank of America ended the first quarter of 2012 wth record capital ratios, record liquidty and substantial reserves," the bank said in a statement. "We have sufficient liquidy and resources to serve clients and customers."

Moody's began its downgrade review of 17 banks in February. Two banks, Macquarie, headquartered in Sydney, Australia and Nomura, based in Tokyo, were downgraded already in March.

"Ultimately, the downgrades are likely to trigger some near-term volatility," said Jody Lurie, corporate credit analyst at Janney Capital Markets.

In the long term, banks that were downgraded, particularly into the triple B range, will have higher costs to finance their lending activities. This higher cost of capital for the banks may translate to higher costs to consumers when accessing the banks for mortgages or small business loans. Theoretically, banks with the highest ratings and those not affected by the downgraded may be able to provide better rates, Lurie said.

"In some ways, Moody's move is a self-fulfilling prophecy: higher financing costs equals less profitability," she said.

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