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Announcement:

Moody's: Senate Regulatory Reform Bill Still Fluid and Still a Potential Negative for Supported US Bank Ratings

Global Credit Research - 27 Apr 2010

New York, April 27, 2010 -- Moody's Investors Service said that the Senate Regulatory Reform Bill (the "Dodd Bill") could result in lower debt and deposit ratings for US banks and other financial institutions whose ratings currently benefit from assumed government support.

"The Dodd bill contains provisions that, if passed into law, could weaken our assumptions regarding the probability that the US government would support the largest, most systemically important financial institutions," said Robert Young, Managing Director for Moody's North American Bank Ratings. "In particular, new resolution authority for 'non-banks', including bank holding companies, could increase the ability of regulators to unwind large, interconnected financial institutions, and this could be detrimental to bondholders over time."

Moody's currently incorporates an assumption about the probability of systemic support that provides ratings 'lift' into its debt and deposit ratings for 17 of the approximately 70 US banks it rates (these 70 comprise 85% of US banking system assets). Far fewer institutions received this lift prior to the financial crisis. As the financial crisis recedes and a new regulatory regime is implemented, Moody's expects to reduce its support assumptions for US banks. This would reduce the number of banks benefitting from support and the amount of support assumed for those banks that continue to benefit from it. However, it is unlikely that Moody's would entirely eliminate its assumption of support for all institutions.

Even after the final structure of regulatory reform is established, we expect there to be countervailing forces that could (1) limit the reduction in Moody's assumption of the likelihood of future support or (2) extend the period of time over which Moody's would reduce its support assumptions. This will be determined, in large part, by the flexibility that regulators will be provided to deal with troubled institutions or systemic problems. Moody's will need to consider the credibility/probability of the actual use of the provisions, including resolution authority, especially over the near-term while the economy remains fragile. Regarding this point, mandatory usage of the law's provisions would be particularly challenging for bank credit from both an individual institution as well as a systemic risk perspective.

Additionally, Moody's would need to take into account the potential benefits and costs to banks' stand-alone credit strength that could result from the law. These, too, can only be assessed once the final provisions of the legislation are established. Provisions that increase required capital and liquidity buffers at banks would, on their face, improve banks' stand-alone credit standing. This would offset some of the negative pressure on the debt and deposit ratings of those banks which currently receive some ratings lift due to support. Yet, some of the proposed limitations on bank activities, such as proprietary trading or over-the-counter trading in derivatives, might weaken the earnings power of some banks. In addition, through their search for shareholder returns, banks may seek to expand risk-taking elsewhere. Finally, Moody's will also consider the pace over which any benefits would accrue to banks' stand-alone credit strength versus the likely pace over which systemic support would be curtailed.

Given continued uncertainties with regard to the final form of any regulatory reform in the United States, Moody's is unlikely to take related actions on potentially affected banks' ratings until there is clarity on the law's content and implications. As well, given the issues discussed above, it is unlikely that Moody's would simply change ratings once clarity is achieved, but rather Moody's would more likely place potentially affected ratings under review at that time.

The following is a list of those US banks whose ratings currently benefit from Moody's assumption of support (including their bank deposit rating and the number of notches of "lift" that this rating currently receives as a result of Moody's support assumptions):

Bank Of America, Aa3, 5 notches

Citigroup, A1, 4 notches

Wells Fargo, Aa2, 4 notches

Bank of New York Mellon, Aaa, 2 notches

JPMorgan Chase, Aa1, 2 notches

Morgan Stanley, A1, 2 notches

Regions Financial, Baa1, 2 notches

SunTrust, A2, 2 notches

BB&T, Aa2, 1 notch

Capital One, A2, 1 notch

Fifth Third, A2, 1 notch

Goldman Sachs, Aa3, 1 notch

KeyCorp, A2, 1 notch

PNC Financial, A1, 1 notch

State Street, Aa2, 1 notch

US Bancorp, Aa1, 1 notch

Zions, Ba2, 1 notch

Please see Moody's "Dodd Bill May Reduce Systemic Support for Bank Debt", dated March 2010, for further analysis of the provisions of the originally proposed Dodd Bill.

* * *

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1076; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7-495-228-60-60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Craig Jamieson in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Sean Jones
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: Senate Regulatory Reform Bill Still Fluid and Still a Potential Negative for Supported US Bank Ratings
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