Ratings on bank-level subordinated debt also affected
New York, August 22, 2013 -- Moody's Investors Service has placed the senior and subordinated debt
ratings of the holding companies for the six largest US banks on review
as it considers reducing its government (or systemic) support assumptions
to reflect the impact of US bank resolution policies. Four --
Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo
-- are on review for downgrade. Two, Bank of
America and Citigroup, are on review direction uncertain,
as the rating agency considers the potentially offsetting influence of
improvements in the standalone credit strength of their main operating
subsidiaries, the ratings on which were simultaneously placed on
review for upgrade. Included in the review are the short-term
ratings of several of these bank holding companies, as described
further below. Two additional banks, Bank of New York Mellon
and State Street, whose ratings were previously placed on review
for downgrade, are also included in this review.
At the same time, and also in response to the possible reduction
of government support assumptions, the ratings on the bank-level
subordinated debt of JP Morgan Chase Bank N.A. and Wells
Fargo Bank N.A. were placed on review for downgrade,
while those at Bank of America N.A. are on review direction
uncertain. The bank-level subordinated debt ratings of The
Bank of New York Mellon and State Street Bank and Trust, which were
previously placed on review for downgrade, are also included in
the review. There is no rated bank-level subordinated debt
outstanding at Citibank N.A., Goldman Sachs Bank USA
or Morgan Stanley Bank N.A.
Moody's actions follow its March 2013 announcement that it would
reassess its support assumptions for bank holding companies in the US
and that it would consider whether to revise these assumptions by the
end of the year.
As US bank resolution policies continue to evolve, Moody's
will assess the opposing forces that may have an impact on bondholders
at the holding company level should a bank become financially distressed.
The first is a lower level of systemic support that could result in a
higher probability of default. The second is the potential for
a more orderly workout and a required minimum level of holding company
debt that may well limit losses in the event of a default. The
reviews will also consider the implications of such policies for bank-level
subordinated bonds, which may also be subject to burden-sharing
in the event of severe financial distress. In addition, for
four of the eight banks -- Bank of America, Citigroup,
Bank of New York Mellon, and State Street -- the reviews
will also consider the banks' standalone or baseline credit assessments
-- positively for the first two, and negatively for
the latter two.
"In the past year, we have seen progress towards establishing
a framework to credibly resolve these large systemically-important
banks, as called for under the Dodd-Frank Act,"
said Robert Young, Managing Director. "We have also
seen greater cooperation and discussion among international banking regulators
to manage the coordinated resolution of global banking groups."
The following ratings were placed on review for downgrade:
The Goldman Sachs Group, Inc. -- A3 senior,
Baa1 subordinated and Baa3 (hyb) trust preferred vehicles
JP Morgan Chase & Co. -- A2 senior, A3
subordinated, Baa2 (hyb) trust preferred vehicles and Prime-1
short-term rating
JP Morgan Chase Bank N.A. -- A1 subordinated
Morgan Stanley -- Baa1 senior, Baa2 subordinated,
Ba1 (hyb) trust preferred vehicles and Prime-2 short-term
rating
Wells Fargo & Company, Inc. -- A2 senior,
A3 subordinated, Baa1 (hyb) trust preferred vehicles and Prime-1
short-term rating
Wells Fargo Bank, N.A. -- A1 subordinated
and A3 (hyb) trust preferred vehicles
Bank of America Corporation -- Prime-2 short-term
rating
Citigroup, Inc. -- Prime-2 short-term
rating
The following ratings continue to be on review for downgrade, as
initiated on July 2, 2013:
The Bank of New York Mellon Corporation -- Aa3 senior,
A1 subordinated, A2 (hyb) trust preferred vehicles and Baa1 (hyb)
noncumulative preferred
The Bank of New York Mellon -- B bank financial strength
rating (BFSR)/aa3 baseline credit assessment (BCA), Aa1 deposits
and senior and (P)Aa2 subordinated
State Street Corporation -- A3 (hyb) trust preferred vehicles
and Baa1 (hyb) noncumulative preferred
State Street Bank and Trust Company -- B BFSR/aa3 BCA,
Aa2 deposits and senior and Aa3 subordinated
The following ratings were placed on review for upgrade:
Bank of America, N.A. -- D+ BFSR/baa3
BCA, A3/Prime-2 deposits and senior
Bank of America Corporation -- B1 (hyb) noncumulative preferred
Citibank, N.A. -- D+ BFSR/baa3
BCA, A3/Prime-2 deposits and senior
Citigroup, Inc. -- B1 (hyb) noncumulative preferred
The following ratings were placed on review direction uncertain:
Bank of America Corporation -- Baa2 senior, Baa3 subordinated
and Ba2 (hyb) trust preferred vehicles
Bank of America, N.A. -- Baa1 subordinated
Citigroup, Inc. -- Baa2 senior, Baa3
subordinated and Ba2 (hyb) trust preferred vehicles
State Street Corporation -- A1 senior, A2 subordinated
(direction of review initiated July 2 changed from review for downgrade)
The Prime-2 short-term rating of The Goldman Sachs Group,
Inc. was affirmed. The noncumulative preferred stock ratings
of The Goldman Sachs Group, Inc., JP Morgan Chase &
Co., Morgan Stanley and Wells Fargo & Company,
Inc. have also been affirmed. The standalone credit assessments
and the short- and long-term deposit, issuer,
and senior debt ratings of Goldman Sachs Bank USA, JP Morgan Chase
Bank N.A., Morgan Stanley Bank N.A.
and Wells Fargo Bank, N.A. were also affirmed.
For a full list of all affected ratings, click here: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_157695.
This list is an integral part of this release.
RATINGS RATIONALE
PROGRESS TOWARDS CREDIBLE RESOLUTION MECHANISM AFFECTS RISKS FOR BANK
HOLDING COMPANY CREDITORS
As US bank resolution policies evolve, Moody's will review
two opposing effects that influence risks for bondholders at the holding
company level. The first effect is the reduced likelihood and predictability
of systemic support that would result from a credible bank resolution
mechanism. Such mechanisms are designed to allow regulators to
restore the solvency of a distressed bank without using taxpayer funds.
The second, opposing effect is the possible reduction in the severity
of losses for holding company creditors in the event of a default under
a future US bank resolution. If executed as intended, more
of a banking group's value may be preserved versus a bankruptcy
scenario due to a more orderly resolution of the entity. And expected
requirements regarding holding company debt levels may provide greater
resources for restoring solvency, reducing the size of haircuts
imposed on holding company creditors.
"In other words, the risk of default may be increasing because
authorities may be less likely to support a banking group, while
losses in the event of default (loss severity) may be decreasing,"
said Robert Young, Managing Director.
MOODY'S CONTINUES TO ASSESS EVOLVING RESOLUTION POLICIES
In June 2012, Moody's placed negative outlooks on the holding
company ratings of all systemically-important US banking groups
whose debt ratings benefit from "uplift" due to government
support above what they would be rated based solely on their standalone
credit quality. The negative outlooks reflected the progress the
Federal Deposit Insurance Corporation (FDIC) had made in devising a mechanism
to implement the Orderly Liquidation Authority (OLA) enacted as part of
the Dodd-Frank Act. OLA gives the FDIC the authority to
resolve financially-distressed systemically-important financial
institutions but also requires that it be done without using taxpayer
funds while avoiding financial market contagion. At the same time,
Moody's assigned stable rating outlooks to the bank/operating subsidiary
obligations of these firms.
In a March 2013 comment, "Reassessing Systemic Support in
US Bank Ratings -- An Update and FAQs," Moody's
outlined the four areas where major hurdles remained to an orderly resolution
of these banks: international regulatory cooperation, capital
structure, corporate structure, and market structure.
Although hurdles to the successful use of OLA by the FDIC remain,
conviction is clear, progress continues, and momentum has
built. This progress includes continued dialogue among international
regulators, an expectation that the Federal Reserve will establish
minimum standards for holding company debt to facilitate OLA, further
refinement of "living wills," and some reduction in
interconnectedness among banks.
IF USED, SINGLE POINT-OF-ENTRY RECEIVERSHIP WOULD
RESULT IN A DEFAULT FOR HOLDING COMPANY CREDITORS
In its review, Moody's will focus on the resolution mechanism
referred to as Single Point-of-Entry Receivership (SER).
SER is the FDIC's stated preferred mechanism for implementing OLA.
Under this framework, the FDIC would impose losses on bank holding
company creditors in order to recapitalize and maintain the operations
of its systemically-important subsidiaries.
If resolution through SER is likely to be attempted in the event of distress
at these banks, this will result in a lower expected probability
of government support for bank holding company debt, signifying
a higher risk of default. Seven of the eight holding companies
on review currently benefit from one notch (for Bank of New York Mellon
and Wells Fargo) or two notches (for Bank of America, Citigroup,
Goldman Sachs, JP Morgan Chase, and Morgan Stanley) of uplift
from government support. State Street's holding company ratings
do not currently incorporate any uplift. A conclusion that the
probability of government support is lower may result in either a partial
or complete removal of this uplift from the current ratings.
HOWEVER, LOSSES MAY BECOME LESS SEVERE UNDER SINGLE POINT-OF-ENTRY
RECEIVERSHIP
Moody's will also consider whether the use of SER is likely to reduce
the severity of loss for holding company creditors. Moody's
current ratings anticipate that these creditors would sustain very high
losses in the event of a default because bank holding company defaults
have typically involved a holding company bankruptcy following the seizure
and liquidation of its bank subsidiary. In contrast, under
SER, a distressed banking group's systemically-important
subsidiaries continue to operate, thus potentially preserving their
value to the benefit of senior holding company creditors.
Another development that may reduce loss severity is the US regulators'
plan to require banks to hold a certain amount of debt at the holding
company level. This holding company debt is designed to be the
primary cushion to absorb losses in the event of a workout. For
a given loss, the larger the cushion, the more likely that
not all of the holding company debt would be written down or converted
to equity in a default scenario under SER .
For each of the banks on review, a reduction in Moody's severity
of loss assumptions for holding company bondholders may offset some or
all of the negative ratings effect of a higher probability of default
stemming from a reduction in government support assumptions. However,
any ratings benefit from a lower loss severity assumption is unlikely
to exceed one notch.
SUBORDINATED CREDITORS AT BANK LEVEL COULD ALSO FACE GREATER RISKS
The review will also consider the implications of the evolving US bank
resolution policies on bank-level subordinated debt that currently
includes uplift due to the potential for systemic support. SER
is intended to allow systemically-important subsidiaries to continue
to operate without defaulting on their own obligations, even if
holding company creditors experience a default. However,
Moody's sees two potential risks for bank-level subordinated
creditors. The first is that even if SER were to be utilized,
there remains the risk that bank-level subordinated creditors could
be subject to a distressed exchange at the outset of the resolution.
The second is that, unlike senior creditors at the operating bank
level, bank-level subordinated creditors may not benefit
from any incremental government support the authorities may feel compelled
to provide to ensure systemic stability if SER is not sufficient to prevent
a default at the operating bank.
During the review, Moody's will evaluate these risks and will
also consider the risk to bank-level subordinated creditors relative
to holding company senior creditors. While these risks may result
in lower ratings for bank-level subordinated debt, the ratings
are unlikely to fall below the holding company senior debt ratings.
STANDALONE CREDIT CONSIDERATIONS
The standalone credit assessments of four of the eight banks are also
on review. Moody's today placed the standalone credit assessments
of Bank of America and Citigroup on review for upgrade. An upgrade
of either Bank of America's or Citigroup's standalone credit
assessment may offset some or all of the negative ratings effect of a
potential reduction in government support assumptions.
The standalone credit assessments of State Street and Bank of New York
Mellon had been placed on review for downgrade last month (see "Moody's
Places BNY Mellon, Northern Trust and State Street on Review for
Downgrade," July 2, 2013). They remain on review.
A downgrade of Bank of New York Mellon's standalone credit assessment
could amplify the ratings effect of a potential reduction in government
support. State Street's ratings would be negatively affected
only by a lower standalone credit assessment; its holding company
ratings do not currently incorporate any uplift due to government support.
However, as with the other seven banks, its holding company
debt ratings may benefit from a lower loss severity assumption.
OTHER SYSTEMICALLY-IMPORTANT SUBSIDIARIES
As part of today's rating action, Moody's placed the
ratings of a number of these firms' systemically-important
and highly-integrated subsidiaries on review, primarily for
upgrade. SER is designed to stabilize all systemically-important
operating subsidiaries of these firms, which may include non-banks
and non-domestic subsidiaries. Historically, Moody's
has not attributed the full benefit of potential government support to
these subsidiaries' ratings. In addition to the factors discussed
above, the review of these entities will consider whether support
is more likely for them under SER. The ratings of Bank of New York
Mellon's other systemically-important subsidiaries were placed
on review for downgrade last month, reflecting pressures on their
baseline credit assessments. Today's rating action changes
the direction of the review to uncertain to consider the potential for
more support under SER.
BANK --SPECIFIC CONSIDERATIONS
Bank of America and Citigroup
The review of Bank of America N.A.'s D+/baa3
baseline credit assessment will consider the benefits to Bank of America's
creditors from reduced tail risks and expenses related to its legacy mortgage
exposures. The bank has reached settlements on a variety of legal
fronts, and a legal decision expected this fall may well further
reduce the risk of additional mortgage repurchase losses by approving
the bank's settlement of Countrywide's repurchase obligations
on private-label RMBS. In addition, as the US housing
market improves, stress losses on mortgages have declined and mortgage
servicing costs are also expected to decline.
During the review, Moody's will evaluate the extent to which
these developments, together with ongoing efficiency initiatives,
are likely to improve Bank of America's profitability as well the
consistency of its earnings over the next few years. Stronger,
more consistent earnings from Bank of America's core banking franchises
would provide thicker shock absorbers to protect creditors from the potential
volatility and inherent risk opacity of the bank's sizeable global
capital markets business.
Moody's placed Citibank N.A.'s D+/baa3
baseline credit assessment on review for upgrade, reflecting the
firm's declining exposure to legacy assets, strengthened profitability
and improved capital. Nonetheless, Citigroup remains one
of the world's most complex and global banks and represents a formidable
risk management challenge, particularly as pressure for growth and
increased returns continues. Management incentives and risk controls
are also important, given the absolute size of Citigroup's
global markets activities. Given these challenges, Moody's
review will focus on Citigroup's potential returns and earnings
stability as management continues to hone its strategy.
An upgrade of Bank of America's or Citigroup's baseline credit
assessment may at least partially offset the ratings effect of a potential
reduction in government support for holding company creditors.
In addition, the holding company ratings may benefit from a lower
loss severity assumption from Moody's. For these reasons,
the review of Bank of America's and Citigroup's senior and
subordinated holding company ratings is with direction uncertain.
Because Moody's is not reconsidering its support assumptions for
bank deposits and bank-level senior debt obligations, ratings
for those obligations are on review for upgrade along with the baseline
credit assessments.
The holding company short-term ratings at Bank of America Corporation
and Citigroup, Inc. are on review for downgrade, in
contrast with the review direction uncertain of their long-term
ratings. The potential negative impact of a lower government support
assumption is not expected to be offset enough by other factors,
including any positive benefits of improvements in their standalone credit
strength, to result in a higher short-term rating.
Bank of New York Mellon and State Street
On July 2, 2013, Moody's placed the B/aa3 baseline credit
assessments and all other long-term ratings of State Street and
Bank of New York Mellon on review for downgrade. The review was
initiated in order to examine the long-term profitability challenges
facing these very highly-rated banks. These profitability
challenges are driven by the aggressive pricing of these banks'
core custody products and services, such that their overall fee
revenue is roughly similar to their total expenses. The review
will also examine the banks' ability to generate more revenue from custody-related
services and cut costs.
The review for Bank of New York Mellon will now also include a reassessment
of the level of systemic support incorporated into the holding company
ratings. The review for both firms will now include a reassessment
of Moody's loss severity assumptions for holding company creditors
and the level of systemic support included in the subordinated debt ratings
at the bank operating company level.
State Street's ratings would be negatively affected only by a lower
standalone credit assessment; its holding company ratings do not
currently incorporate any uplift due to government support. However,
as with the other seven banks, its holding company debt ratings
may benefit from a lower loss severity assumption. For these reasons,
the review of State Street's senior and subordinated holding company
ratings has been changed from review for downgrade to review direction
uncertain.
Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells
Fargo,
The reviews will consider the level of systemic support incorporated into
the bank holding company ratings, the loss severity assumptions
in those ratings, and the level of systemic support included in
the bank-level subordinated debt ratings of each firm.
The holding company short-term ratings at JP Morgan Chase &
Co., Morgan Stanley, and Wells Fargo & Company,
Inc. are also on review for downgrade, reflecting the potential
impact of a downgrade of their long-term ratings. The holding
company short-term rating at Goldman Sachs Group, Inc.
was affirmed because even if all government support is removed and no
benefit from lower loss severity is included, the holding company's
current Prime-2 short-term rating would not change.
The baseline credit assessments of all four banks were affirmed,
together with the ratings on their bank deposits and bank-level
senior debt obligations.
The principal methodology used in ratings of Citigroup Inc.,
Wells Fargo & Company, State Street Corporation, and Bank
of New York Mellon Corporation (The) was Global Banks Methodology published
in May 2013. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
The principal methodology used in ratings of Goldman Sachs Group,
Inc. was Global Securities Industry Methodology published in May
2013. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
The methodologies used in ratings of JPMorgan Chase & Co.,
Bank of America Corporation, Morgan Stanley were Global Banks Methodology
published in May 2013, and Global Securities Industry Methodology
published in May 2013. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies..
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Peter E Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's reviews US bank holding company ratings to consider reduced government support
