The credit-rating agency Moody's has downgraded 15 of the world's largest banks, adding a new element of uncertainty to markets already unnerved by a debt crisis in Europe and slowing economic growth in the U.S. and elsewhere. Five American banks — JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley — were targeted, as well as major banks in Europe and Canada. It is the first time since 2007 that Moody's has conducted such a sweeping downgrade, a sign of renewed instability in the financial system. Here, four takeaways:
1. Bank profits — and your pocketbook — could take a hit
The downgrades officially stamp the banks as less creditworthy than they once were, which means it will likely cost them more to secure credit, the lifeblood of the financial industry. (Lenders are expected to ask the banks put up more collateral, or assets that can be seized if banks don't repay their loans.) The more expensive it is for banks to find financing, the lower their profits — and banks are likely to recoup their losses by passing on the costs to consumers, probably by making it more costly to take out mortgages and get credit cards.
2. Banks may start taking fewer risks
The banks hit hardest — such as Morgan Stanley, whose credit rating was lowered two notches — were those that largely rely on riskier trades to make profits. JPMorgan and other banks that have more traditional revenue sources (such as home loans) and a large base of customer deposits were deemed the most creditworthy. Moody's has effectively tilted the playing field in favor of traditional banks, which will now enjoy an advantage in getting cheap financing. As a result, riskier banks are already starting to change their business models to prove that they're safe investments, which could reflect a fundamental shift toward safety after an explosion of risk-taking that caused the financial crisis in 2008.
3. Markets are calm… for now
Moody's warned about the credit downgrades in February, and markets have already taken them into account by pushing down banking shares over the past few months. Markets reacted to the official announcement from Moody's with equanimity, and banking share prices have been stable. However, amidst bad economic news from Europe and the U.S., the downgrades could start to weigh heavily on a jittery system in the months ahead. Indeed, governments around the world continue to prop up the financial system to make sure banks don't get caught in a credit crunch. Just this week, the Federal Reserve announced that it would extend the lifespan of a liquidity program that has helped keep credit flowing.
4. There could be more downgrades to come
With the euro crisis perpetually threatening to unleash global economic chaos, the world's mega-banks could see additional downgrades in the months to come. According to some analysts, there is skepticism that they have enough cash on hand to adequately batten the hatches if the crisis takes a serious turn for the worse.