The big US banks get hit with a ratings downgrade

The credit rating agency Standard & Poor’s (S&P) downgraded eight of the country’s largest banks a notch, saying it believes the banks are less likely to get a government bailout if they find themselves in financial trouble.

After the financial crisis, the bank bailouts, and all that talk about too big to fail, the Dodd Frank financial reforms passed in 2010 set up new rules to try to make banks more responsible for themselves. Stuart Plesser, a senior director at S&P, said the agency thinks those reforms are now far enough along.

“It’s less likely that the government would come in and support U.S. banks,” he said. 

Not impossible, just less likely.

“This is not guaranteed that [regulators’] plan will work, but we recognize that steps have been made to make it more effective than it used to be,” he said. 

Plesser said the assumption that the government would support big banks had previously bumped their ratings up a notch. No more.

“It had immense value,” said Daniel Carpenter, a government professor at Harvard University. “The implicit guarantee from the notion that taxpayers and the government could bail out the banks allowed them to open lots of subsidiaries and take on additional risk.”

Carpenter said S&P’s move shows it believes that risk has now shifted from the taxpayer to the banks themselves, as well as their shareholders or bondholders.  

That would be a good thing for the American public. So if the downgrade feels counterintuitive, remember, S&P isn’t judging the safety of the American financial system.

“Their job is to tell people who buy bank bonds what risk do you have here,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “So any change that moves the risk more toward  the shareholders and bondholders and away from the taxpayers may be good for America, but may not be good for bank bondholders.”

The impacted banks either declined to comment or didn’t respond to requests for comment, but S&P’s move is not a surprise, said Gerard Cassidy, a managing director at RBC Capital Markets — he follows bank stocks.

“The credit spreads, which is how we measure the cost of borrowing, really hasn’t moved based on this change,” he said. “In our view, the market was already anticipating that the ratings agencies were going to this and had priced in this type of change.”