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GET READY FOR ANOTHER BANKING CRISIS!!
Standard & Poor's ("S&P") Ratings Services, phas downgraded the senior unsecured and non-deferrable subordinated debt ratings of eight major U.S. banks by one level, which were kept under review for a downgrade last month. These banks include The Goldman Sachs Group, Inc., Wells Fargo & Company , JPMorgan Chase & Co., Citigroup Inc., Bank of America Corporation, The Bank of New York Mellon Corporation, State Street Corporation and Morgan Stanley.

In October, the Federal Reserve Board,proposed a new long-term debt and capital requirement level for the “too big to fail” banks. Under the proposed rule, the selected banks will be required to include the long-term debt in their respective holding companies’ balance sheets. Notably, such debt can be converted into equity in the event of a failure, as this would help infuse the capital required to support critical operations during a crisis.

Regulators are planning to build liquidation plans for U.S. banks to combat another financial crisis. Change in federal policies to support troubled banks is the rationale behind the S&P downgrade.

Bottom Line

Downgrade in the ratings by S&P of major global banks will lower investors’ confidence in the stocks, though it might prepare the firms to better tackle another economic crisis. Moreover, it might increase funding costs, thereby leading to higher expenses impacting the banks’ financials further. -zacks.com

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