Some major banks will find funding more expensive as a result of their credit ratings being cut by Moody's Investors Services.
The move by Moody's, which was made late Thursday, is a measure of Moody's view of the ability of such banks as JP Morgan Chase, Bank of America and Goldman Sachs to repay their debts. These banks, along with European banks Deutsche Bank, Barclays and HSBC, had their ratings cut as a result of concerns over their exposure to violent swings in global financial markets.
The banks "have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities," Moody's global banking managing director Greg Bauer said in a statement outlining the rationale for the downgrades.
Moody's began considering cutting the ratings of major US and European banks as early as February.
Ratings cuts typically mean that these institutions would have to pay more to borrow as their debt becomes riskier. Prospective investors would demand higher interest rates on the loans they provide to the banks. However, interest rates are already at extremely low levels, and the cuts may not have a significant effect on the cost of funding for the banks. In addition, it is believed the the financial markets may have already priced in the negative move, according to Bert Ely, a banking consultant in the Washington DC area,
The Moody's cuts come at a time of increased concerns in global financial markets. The European currency union is shaky at best, with its future in serious doubt. The US economy appears to be slowing, and the economies of India, China and Brazil are cooling off as well.
Daiwa Capital Markets analyst Michael Symonds said the cuts could have been worse and the conclusion of the review removed an uncertainty from the market. However, he warned there could be more downgrades to come.