If you've ever been turned down for a loan, or taken a hit to your credit score, you may get a kick out of this: seven of the eight largest banks in the U.S. had their credit ratings downgraded last week.
Standard & Poor's (S&P), a prominent credit rating agency, made the announcement on November 29. While the action was the result of updated credit standards rather than any sudden change in the financial conditions of these banks, the situation does reflect the tougher environment facing banks these days.
Whatever the reason, the banks will have to live with those downgrades, just as millions of Americans have had to learn to live with lower credit scores. However, the bank downgrades could have broader effects on the economy as a whole.
The S&P downgrades
S&P applied new credit rating standards to 37 banks, resulting in downgrades of 15 of those banks. The victims included seven of the eight largest U.S. banks.
The new standards take a broader view of the economic environment, in an attempt to identify the type of systematic risk that plagued the industry during the financial crisis. In any case, the downgraded banks will be just like anyone with a reduced credit rating--they can now expect borrowing money to be more expensive.
Economic impact
These bank downgrades could have broader implications for the economy. While some of these implications are likely to be negative, there could also be some positives--beyond the immediate feeling of schadenfreude many will get from hearing that banks are having credit problems.
Here are some of the possible economic impacts--two negative ones, and two positive ones.Negative possibilities:
- Layoffs. Bank of America had already announced that it would lay off as many as 30,000 workers; higher borrowing costs could touch off another wave of cost-cutting among banks, dumping more laid-off workers into an already weak job market.
- The threat of failure. At worst, higher borrowing costs could contribute to the risk of large bank failure, setting the industry back to the dark days of 2008.
Positive possibilities:
- A greater emphasis on deposits. Having to pay more to borrow might refocus banks on the fact that they already have a cheap source of capital at their disposal--savings accounts and other deposits. Having to pay more to borrow might encourage banks to offer better CD, savings, and money market rates to attract more capital through deposits.
- A return to core banking businesses. Cost-cutting can only help so much. To regain their health, banks may be forced to seek growth by reviving core business lines, such as lending. This in turn would provide a boost to the economy.
These possibilities will play out over the months ahead. For now, the S&P's downgrade of bank credit ratings is a reminder that the global economy is battling for survival, and that banks, being on the front lines of that battle, are especially vulnerable.
The original article can be found at Money-Rates.com: "Big banks suffer credit downgrade"
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