After Moody”™s downgraded 15 major banks on June 21, the debate began.
Should banks”™ credit ratings be cut now, while the industry is in somewhat better shape and the economy perhaps more stable than it was last year or the year before?
Is now a bad time to lower ratings, while banks are trying to raise capital with Dodd-Frank regulations and the Volcker Rule looming?
Or was Moody”™s action a catch-up move, something that should have been done years ago, before the financial crisis began?
“The rating agencies have had a reaction to criticism they”™ve endured for not being fast enough in spotting problems in asset-backed securities, for example,” said Chip MacDonald, a lawyer at Jones Day in Atlanta whose practice focuses on litigation and regulation of financial institutions. “Now they”™re going the other way, trying to be too conservative. The industry is certainly in much better shape than it was; both the economy and earnings have been improving.”
MacDonald said part of Moody”™s concern reflects the effects of legislation and regulation on the industry, and the risk that imposes. “It makes it harder and more expensive for these parties to finance themselves because of government regulation. Regulation is appropriate, but I”™m not sure the regulation we”™ve added is completely necessary and effective in solving risk.”
MacDonald, whose firm has relationships with Citigroup and Bank of America, two banks hardest hit by Moody”™s downgrading, said internal control might be more effective. “Banks are in the business of intermediating risk. They take risks and make returns due to the risk they take. Those things can be addressed by internal controls without the Dodd-Frank regulations.”
Danielle Tierney, capital markets analyst at Aite Group in Boston, said it”™s hard to contest the view “that banks should have been downgraded a while ago, that they were posting higher ratings than they should have a while ago. However, it”™s true that the actual capital ratios and certain controls that banks have have gotten better in response to public outrage. Bank of America can say they have record capital ratios but they can”™t quantify how strong their corporate governance and risk management are.”
Tierney said the big banks may be trying to mollify public opinion, “but after the crisis and post-crisis and continuance of giant corporate bonuses they”™ll have to do so much more to get back in the public”™s good graces. People are just so angry at these banks for their egregious remuneration packages.”
