The U.S.'s biggest banks, including Citigroup, Bank of America, Goldman Sachs and JPMorgan Chase, may see their credit ratings cut by Standard & Poor's (S&P), as the government is viewed as less likely to provide aid to them in a future crisis.
The ratings agency placed the non-operating holding companies of the following banks on "credit watch negative" on Tuesday:
- Bank of America (BAC)
- Bank of New York Mellon (BK)
- Citigroup (NYSE:C)
- JPMorgan Chase (JPM)
- Morgan Stanley (MS)
- State Street (STT)
- Goldman Sachs (GS)
- Wells Fargo (WFC)
"Credit watch negative" means there is a 50 percent chance the banks' ratings will be cut within the next three months. S&P plans to conclude a review by year-end to determine whether it should continue to incorporate "extraordinary government support" in its rankings for systemically important banks — those whose collapse could damage the U.S. or global economy.
The agency's move came after the U.S. Federal Reserve approved a rule that would force large banks to hold a stockpile of debt that could be converted into equity in times of difficulty.
"The action reflects our belief that U.S. regulators have made further progress and provided more clarity in enhancing their plans for resolving systemically important institutions — lowering the probability that the U.S. government would provide extraordinary support to these institutions to enable them to remain viable. This is substantiated by the notice of proposed rulemaking (NPR) the Federal Reserve made public last Friday," S&P said in a note.
S&P said that the assumption of government support in an emergency currently added one or two notches to the ratings of the eight banks' holding companies.
The U.S. government and the Fed are under pressure to solve the "too big to fail" problem associated with the global financial crisis of 2008. This saw financial institutions likes State Street, Bank of America and JPMorgan receive massive government support packages, due to fears of a possible broad-based collapse of the financial sector.