Image by TreyDanger via Flickr

The recession may be over, but banks are finding they’re still fighting to hang on to their credit ratings. Both major banks in the United States and Europe face scathing downgrades to their credit ratings can devalue stock and increase the cost to borrow money. The Standard and Poor’s (S&P) rating service is getting ready to unveil new criteria or banks that will affect at least 37 financial company ratings. Even without all the data being released, the initial news is not good for some major American banks.
 
 
 
 
 
 
 
 
 
 

American Banks Affected

Banks losing at least one step in their credit rating include Citigroup, Inc., JPMorgan Chase, Goldman Sachs, Wells Fargo, Morgan Stanley, and Bank of America. Bank of America, Countrywide, and Merrill Lynch face some of the worst news. Their rating, and some of their subsidiaries, was cut from “A” to “A-.” Charlotte-based Bank of America’s stock had already plummeted to a two year low before the announcement. After the announcement, the shares fell another 17 cents to end at $5.08. Citigroup and Goldman Sachs also lost value on their shares.

More Mayhem

Losing money in the stock market is one negative effect of a downgrade, however, that’s just the start. If the downgrade is severe enough, it can trigger contract provisions in derivative agreements that affect the amount of collateral that has to be used to maintain the contracts. In the worst case, it can actually cause provisions that terminate the derivatives contract with major losses resulting. This will strain a bank’s liquidity and make them even more sensitive to financial shocks. With so much uncertainty in the banking system and economic news from Europe, new financial shocks along with restricted credit would mean that some banks might not have enough capital to survive. This could trigger a bunch of bank failures and those would the worst credit ratings would be the first on the shopping block.