Moody's Places America's Biggest Banks Under Review

Moody's Investors Service warned more than a dozen of America's and Europe's biggest banks with significant global capital markets operations that it was placing them under review for possible downgrades. The major American banks that Moody's placed under review for possible downgrades were Bank of America (NYSE: BAC), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS).

The warning from Moody's came on the heels of an earlier warning to more than 100 European banks that they might also be downgraded. Although several of the global European banks like Deutsche Bank (NYSE: DB) and HSBC Holdings (NYSE: HBC) were covered under the earlier downgrade warning, the later warning addressed negative factors that were faced solely by banks with global capital markets operations.

The downgrade warnings reflect the more difficult environment that major banks find themselves in after a financial crisis that saw many of them receive government support. Regulators are taking a closer look at the banks' activities and the banks will find it more difficult to receive government support if faced with another economic crisis, in part because of public anger over issues related to the last round of bank bailouts.

Addressing important issues that the major international banks were having to deal with, Moody's said that "capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms."

Moody's went on to say that "some of these risks have been partly mitigated by changes to business models, and higher regulatory capital and liquidity requirements, but they have not been eliminated. Furthermore, these adverse trends 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."

Although there are those who say that Moody's concerns might have already been factored into the share prices of the banks' stocks, it's worth noting that several major international banks have recently cited weakness in their investment banking units during disappointing earnings announcements. If the downgrade warning from Moody's Investors Service proves to be warranted, shareholders of banks like Citigroup and Morgan Stanley could see the value of their investments fall.