Moody's Cuts Credit Rating For Top US Banks

A leading US rating agency has cut the credit standing for four of America's biggest banks over fears the government will not bail them out if they fail.

Moody's Investors Service said it was cutting its ratings for holding companies for Bank of New York Mellon Corp, Goldman Sachs Group (Berlin: GOS.BE - news) , JPMorgan Chase (Berlin: CMC.BE - news) and Morgan Stanley (Xetra: 885836 - news) by one notch.

The cuts may increase banks' borrowing costs and force them to post more collateral in derivatives trades, weighing on their profits.

The downgrades also underscore how regulators are successfully convincing at least some parts of the bond markets that in a crisis, investors in the bank holding companies are likely to have to take losses.

The US Federal Deposit Insurance Corporation (FDIC) has hosted dozens of meetings with bond investors, analysts and other stakeholders since last year to explain how this scenario would play out.

Moody's managing director Robert Young said that the US government's bank regulators have created a credible plan.

While the four big names suffered a drop, Moody's has held stable ratings for four other major players - Bank of America (Other OTC: BACYL - news) , Citigroup (NYSE: C - news) , State Steet and Wells Fargo (Berlin: NWT.BE - news) .

Under the plan created by the Federal Reserve and the FDIC, the latter would take over a failing bank holding company, wiping out the bank's shareholders and hitting some bondholders with losses.

The steps would keep the operating subsidiaries, such as the deposit-taking banks, alive.

Bond investors and bank executives are watching to see how the liquidation plans might change how banks fund themselves.

In particular, how much debt banks might issue from their holding companies, and how much their operating subsidiaries might issue.

Moody's senior vice president David Fanger said that debt from the subsidiaries has become more creditworthy as the government has developed liquidation plans to focus on the holding companies.

The Fed plans to issue a proposal to require the largest banks to issue minimum amounts of long-term, unsecured debt from their holding companies to absorb losses in a liquidation.

The US government was forced to bail out a number of major banking and insurance companies starting in 2008, as the world's financial system stood at the brink of disaster.

That prompted demands for rules that would prevent a repetition of any situation in which a company would be deemed "too big to fail."