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The Moody's Bank Downgrade: What You Need to Know
Posted by: Charles Sizemore (IP Logged)
Date: June 21, 2012 10:45PM

Before I call it a night, I wanted to put out a quick note about Moody's decision on Thursday to downgrade 15 of the world's largest banks.

Hearing the words "bank" and "downgrade" together in the same sentence can be scary, as it brings back unpleasant memories of the 2008 meltdown. As you might recall, every major U.S. bank either received a bailout, had to restructure, or--in the case of Lehman Brothers and Bear Stearns--went bankrupt. It was a scary time for all of us.

So, with that said, what exactly did Moody's do, and what are the implications for us as investors?

Back in February, Moody's began a major review of the banking industry to assess "the volatility and risks that creditors of firms with global capital markets operations face."

In other words, after the wild ride of 2011, when Greece's debt crisis threatened to take take the world's banks, Moody's wanted to reevaluate the riskiness of the financial sector. And they were shocked--SHOCKED--to find that banks are riskier credits than they had originally thought.

Bank of America (BAC), HSBC (HBC), Royal Bank of Scotland (RBS) and Société Générale were each lowered one notch, and Morgan Stanley (MS), UBS (UBS), Barclays (BWV), BNP Paribas, Citigroup (C), Crédit Agricole, Deutsche Bank (DB), Goldman Sachs (GS), JPMorgan Chase (JPM) and Royal Bank of Canada were each lowered by two notches. Poor Credit Suisse was the only bank to suffer the indignity of being downgraded by three notches.

What does this mean for the banks?

Not all that much, really. It will cost them more to borrow money, but much of this was anticipated beforehand and already reflected in market yields. In the short term, this will probably bite into profits, and over the medium-to-long term, it will mean less borrowing and lending by the banks. This is a trend that has been in effect since 2007, but this will likely speed it along.

What does this mean for the economy?

In the short term, less lending sucks demand out of the economy, which is bad for growth. But over the longer term, a more conservative banking sector is good for stability.

What does this mean for investors?

If you own shares in the banks affected, it will mean less earnings growth and, all else equal, a lower stock price. For the broader stock market, the result will likely be a mild amount of short-term volatility but little beyond that.

Stocks Discussed: BAC, MS, C, JPM, HBC, RBS, UBS, GS, DB,
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