Senate Vote on Bank Bailout Legislation to Test Rating Agencies

Strategic Insights -

The Senate's financial regulation bill has sparked concern among banking giants, including Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co., regarding the potential impact on their credit ratings. Standard & Poor's has already warned that the removal of implicit government support by Congress would likely lead to downgrades on some banks. The bill would give the Federal Deposit Insurance Corp. the power to unwind failing financial firms and bar the use of taxpayer funds to rescue them. The large banks, which currently enjoy long-term ratings of A due to government backing, are preparing for the worst, with some estimating they would need to post an additional $8 billion in collateral or terminate trading deals if their ratings were cut.

Key Takeaways:

  • The Senate's financial regulation bill could lead to downgrades on banks such as Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co., according to Standard & Poor's.
  • The bill's provision to unwind failing financial firms without taxpayer support would likely lead to a downgrade, threatening to cut funding costs for the large banks.
  • Banks may need to post an additional $8 billion in collateral or terminate trading deals if their ratings are cut by one level.
  • Repealing government backing for banks would take their long-term ratings three levels down, from A to below investment grade.
  • Moody's Investors Service will review ratings before a downgrade, but may not announce immediate changes.

Statistics:

  • $8 billion: estimated additional collateral or spending required by banks if ratings are cut by one level (Source: Reuters)
  • A: current long-term ratings of Bank of America, Citigroup, and Morgan Stanley, reflecting government backing (Source: Standard & Poor's)
  • 3 levels: downgrade that would take banks from A to below investment grade (Source: Standard & Poor's)
  • $800 million: assets oversaw by Optique Capital Management (Source: Text)

Sources:

  • Reuters: "S&P warns of bank rating downgrades under US reform"
  • Standard & Poor's: "US Financial Reform Bills May Impact Ratings on Some Banks"
  • Moody's Investors Service: Statement regarding US financial regulation bill
  • CreditSights Inc.: David Hendler, analyst, as quoted in the text
  • Text: Euclid Infotech Pvt. Ltd., provided by Syndigate.info an Albawaba.com company.