Moody’s Investors Service downgraded the credit ratings of three U.S banks Sept. 21, citing concerns over the federal government’s Dodd-Frank financial reform law cutting “too big to fail” company bailouts.
Moody’s, one of the big three credit rating agencies in the world, chose to downgrade the credit ratings of Bank of America, Citigroup, and Wells Fargo after announcing in June that they would review the banks’ ratings. Bank of America was hit hardest by the downgrades.
Moody’s dropped Bank of America’s long-term debt obligation ratings from A2 to Baa1. Baa1 is still an investment grade rating, and indicates a moderate credit risk. The rating service also dropped the bank’s short-term taxable ratings from Prime 1 to Prime 2 and classified its long-term outlook as negative.
The downgrades raised the cost of insuring the bank’s debt—insuring $10 million of Bank of America’s debt will now cost $378,000.
Citigroup saw its short-term rating dropped from Prime 1 to Prime 2 and Wells Fargo had its long-term rating dropped from A1 to A2.
One of Moody’s main reasons for the downgrade was the threat of the Dodd-Frank law, which would potentially block bailouts of the banks should they fail. The government is now inclined to allow large banks fail after bailing out several corporations during the financial crisis in 2008.
“The government shouldn’t just let our biggest banks fail,” freshman Taylor Fischer, a Bank of America customer, said. “The banks still need to take responsibility, but the government shouldn’t just sit back and watch them fail.”
“For our top banks–some of the top 10 money making corporations in America–to lose their credit rating is scary,” said freshman Hugh Davis, also a Bank of America customer.
Davis pointed to the recent downgrade of Italy’s credit rating as a sign the world is still in a recession. Italy was the third country, after the United States and Japan, to have their credit rating downgraded. New Zealand became the fourth after their rating was downgraded on September 29.
“It’s a scary time,” Davis added. “Credit downgrades are a bad reputation for our banks to have right now.”