Moody's Warns Possible Downgrade of 17 Global Banks, Security Firms: How Dim Are Growth Prospects?

Moody's Investors Service placed the ratings of Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. on review for a possible downgrade because it says the business' profitability will be diminished in the long term. Moody's also said Wednesday that it was reviewing J.P. Morgan Chase & Co., Morgan Stanley and Royal Bank of Canada for a possible downgrade.

Nine of the 17 banks and securities firms included in Moody's review are headquartered in Europe. Specifically, Moody's has taken the following actions with regard to the long-term ratings and standalone credit assessments of the 17 global banks and securities firms:For 6 firms, placed long-term ratings on review for downgradeFor 4 firms, extended reviews for downgrade that had been announced beforeFor 7 firms, extended reviews for downgrade initiated with today's earlier announcement on European banks.

During its review, Moody's will consider the structural vulnerabilities in the business models of global investment banks, which include the confidence-sensitivity of customers and funding counter-parties, risk-management and governance challenges, as well as a high degree of interconnectedness and opacity.

Moody's also stated that rapidly changing risk positions expose these firms to unexpected losses that can overwhelm the resources of even the largest, most diversified groups.

According to Moody's, additional challenges have now emerged for banks with significant capital markets activities, which include more fragile funding conditions, higher credit spreads,increased regulatory burdens and very challenging macroeconomic and market environments.

Furthermore, Moody's will take into consideration the adverse trends that have placed acute pressure on these firms' profitability and increased the scope of restructuring required in their core businesses to generate the level of return on equities expected by shareholders.

In most cases, where a firm's standalone credit assessment is lowered, its long-term debt ratings will be lowered by the same number of notches. Debt ratings may decline slightly less for some issuers, because the impact of weakening standalone creditworthiness on default risk for bondholders can be dampened by the likelihood of support from a strong source, such as a national government.