If there’s one thing big banks like less than a deadbeat borrower, it’s a downgrade of their own credit rating. But that’s apparently a distinct possibility for three of America’s biggest financial institutions.
Morgan Stanley (NYSE:MS) Bank of America (NYSE:BAC) and Citigroup (NYSE:C) are all on notice from Moody’s Investors Service (NYSE:MCO) that downgrades of up to three notches are being considered, according to a report in today’s New York Times.
The Times says Morgan Stanley is “most vulnerable” and that the potential cut would put these banks’ credit ratings at Baa2, just above noninvestment grade, or junk.
The report sums up the threat to the three banks, saying they’ve “already said that they would have to put up billions of dollars more in collateral to back trading contracts. Having a substantially lower credit rating than rivals, however, could do much wider damage over time. It could affect billions of dollars in trading contracts that are an important business for Wall Street. Many of these contracts demand that the company on the other side of a trade have a high enough credit rating.”
Moody’s has been holding discussions with the banks as they try to convince the agency that they’re really in better shape than it thinks. Morgan Stanley spokeswoman Jeanmarie McFadden told the Times that “the company had spent more than two years restructuring its business so that it was ‘less risky and less capital intensive,’ something that should help its rating.”
While the banks claim their operations can continue even if the downgrade does materialize, big banks depend on their counterparties remaining confident in them, and a major downgrade does nothing to instill confidence.