On Monday, Moody’s Ratings announced a downgrade in the long-term ratings for several major U.S. banks, including JPMorgan Chase & Co, Bank of America Corp, and Wells Fargo & Company.
This shift reflects diminished expectations of federal backing following last week’s U.S. sovereign debt downgrade. The rare adjustment for these major financial institutions could lead to higher borrowing costs and increased regulatory scrutiny for banks considered systemically important.
Moody’s downgraded the deposit ratings, senior unsecured debt, and counterparty risk assessments for significant subsidiaries and branches of the affected banks from Aa1 to Aa2.
Previously, these ratings benefited from an uplift linked to the government’s Aaa rating. However, Moody’s now considers this support less credible due to the U.S. sovereign debt downgrade to Aa1.
JPMorgan Chase, the largest asset-holder among U.S. banks, retained a positive outlook despite the downgrade due to its robust capital base and strong position within the market. This outlook suggests a possible future upgrade if the bank’s fundamentals remain strong.
Conversely, Bank of America and Wells Fargo saw their outlooks improve from negative to stable on their long-term deposit and senior unsecured ratings, reflecting their overall financial stability.
Other major financial institutions, such as Bank of New York Mellon and State Street Corp, also experienced downgrades in parts of their debt structures, though they remain at the higher end of Moody’s rating scale.
Notably, Citigroup Inc, Goldman Sachs Group Inc, and Morgan Stanley were not affected, as they had previously separated from sovereign-linked rating uplifts and maintained stable outlooks.
Despite affirming a “Strong+” macro profile for the U.S. banking sector, Moody’s indicated that the recalibrated level of sovereign support could alter market perceptions about the stability of the nation’s financial infrastructure.
While immediate financial impacts are expected to be limited, there could be increased scrutiny on institutional funding and capital strategies moving forward.
The downgrades highlight the close ties between sovereign and financial system ratings in a challenging debt and interest rate landscape, with Moody’s emphasizing that the probability of substantial U.S. government support for large banks has lessened.
