Standard & Poor’s may cut the credit ratings of eight of the country’s biggest banks on news that the Federal Reserve will require large U.S. banks to hold more loss-absorbing capital and long-term debt.
Due to the new rule, S&P on Monday placed on negative credit watch the senior unsecured and nondeferrable subordinated debt ratings of eight banks: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, and State Street. S&P said it expects to resolve the credit reviews by early December.
“The action reflects our belief that U.S. regulators have made further progress and provided more clarity in enhancing their plans for resolving systemically important institutions,” S&P said in its statement. The progress lowers “the probability that the U.S. government would provide extraordinary support to these institutions to enable them to remain viable.”
A Bloomberg article story said that bonds of U.S. banks have gained 2.03% in 2015, compared with a 4.7% return in the corresponding period last year, according to Bank of America Merrill Lynch index data. The debt has gained 1.08% since the end of August, compared with 0.9% for U.S. dollar-denominated investment-grade corporates.
Because the banks’ creditors would end up providing support under the Fed’s rule, S&P said it was taking no negative actions on the eight banks’ operating entities. The ratings firm placed “core and highly strategic operating subsidiaries” of Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley on “credit watch positive.” That review includes issuer credit ratings and senior unsecured debt ratings.
“With this new rule, fixed-income investors would consider asking for higher yield to hold bank capital debt because of the larger downside with the U.S. government backing off,” Sanford C. Bernstein analyst Hou Wei told Bloomberg. “For equity investors in those banks, they may need to ask for higher returns as well because their holdings could be diluted if bank debt is forced to be converted into equity” when banks falter.
S&P’s long-term issuer rating for Wells Fargo, BNY Mellon, and State Street is A+, the fifth level of investment grade. JPMorgan is one step below at A, and the four other banks are rated A-, which is four steps above speculative grade.