The financial markets anticipate further credit ratings downgrades for large US banks in 2012, according to a new report from Moody’s Analytics.
At the beginning of the year the average CDS-implied rating for the 19 US banks on which Moody’s has data was Baa2, or four notches lower than their A1 average Moody’s rating.
While the aggregate of companies’ CDS-implied ratings are within three notches of their Moody’s rating about 80% of the time, banks have had greater disagreements between their Moody’s and CDS-implied ratings than any other sector for several years, as their exposure to numerous issues remains elevated in investors’ minds.
US banks’ large ratings gaps reflect concern that Moody’s ratings may decline further as systemic support continues to be reduced, diminishing its uplift in ratings.
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The potential for the unintended consequences from new rules to strengthen balance sheets and from regulatory reform in general looms large to investors. Revenues were reduced significantly by some reforms, such as the Durbin Amendment (limiting debit card interchange fees) and the Volker Rule (limiting prop trading and derivatives activities).
The Dodd-Frank legislation directed different banking regulatory bodies to implement about 400 new rulemaking requirements; less than one third have been completed. Regulatory compliance costs are sure to rise. And how the new rules constrain heretofore profitable businesses remains a wild card.
Legal liabilities in the mortgage mess are still an important issue. Faulty mortgage put-backs from investors and GSEs have mounted at some banks, and legal penalties and/or settlements loom unresolved.
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