NEW YORK CITY-Moody’s Investors Service, based here, cut the ratings of 15 major banks on Thursday. The move was expected, as the ratings agency had started a review of bank risk in February, but a few of the firms involved called the downgrade “arbitrary and completely unwarranted.”
For US banks, Moody’s cut its ratings of Bank of America, Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley. Moody’s also lowered its ratings on Royal Bank of Canada and nine European banks, including Deutsche Bank, Barclay’s Bank and BNP Paribas.
Greg Bauer, global banking managing director at Moody’s, said in a statement that all of the banks affected have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities. "However, they also engage in other, often market leading business activities that are central to Moody's assessment of their credit profiles,” he said. “These activities can provide important 'shock absorbers' that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges."
Moody’s said these such risks have led many institutions to fail or to require outside support. The downgrades, the company said, were based on the size and stability of earnings from non-capital markets activities of each firm, capitalization, liquidity buffers, and other considerations, including exposure to the operating environment in Europe, any record of risk management problems, and risks from exposure to US residential mortgages, commercial real estate or legacy portfolios.
In a statement Thursday evening, locally based Citigroup said it “strongly disagrees” with the downgrade. The company has improved its safety and soundness since the financial crisis, with more than $420 billion of surplus liquidity held at the end of 2012, according to the statement. “Moody's approach is backward-looking and fails to recognize Citi's transformation over the past several years, the strength and diversity of Citi's franchise, and the substantial improvements in Citi's risk management, capital levels and liquidity,” according to the statement.
Citi said it has clearly demonstrated since the crisis that it will take all necessary steps to increase and preserve its capital strength. "Since Moody's ratings actions have been well-telegraphed to the market, we believe sophisticated counterparties have long included today's rating actions in their credit analysis,” the company said in the statement. “For this and other reasons, based on Citi's current estimates, we do not believe the impact on Citi's funding and liquidity or its businesses will be material.”
The bank further said that investors have become more sophisticated, and do not rely on ratings alone – particularly from a single agency. Also, Citi said it believes that the US financial system is stronger, not weaker, than it was before the crisis. “Actions by legislators, regulators and firms themselves have substantially enhanced the stability, and resilience, of the system,” the bank said. “Moody's actions ignore this fact."
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