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Moody’s Downgrades Three Major U.S. Banks

Jenny Chen |
September 21, 2011 | 4:24 p.m. PDT

Associate News Editor

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Creative Commons)
Rating agency Moody’s Investors Service downgraded three major American banks on Wednesday, in part because it believes the U.S. government is less likely to step in and support banks should they incur financial trouble. 

Moody’s lowered the ratings for Bank of America, Wells Fargo and Citigroup, which makes it possible they will have to pay more to borrow money.

“The downgrades result from a decrease in the probability that the U.S. government would support the bank, if needed,” Moody’s said in its press release about Bank of America. 

The agency said it thought the government would still provide some support, but would be more likely to allow a bank to fail now that risk of contagion appears to have decreased.  

Both Bank of America and Wells Fargo had their long-term credit ratings dropped, while Citigroup’s short-term credit rating was cut. 

Bank of America was hit the hardest by Moody's readjustment, downgraded from a rating of A2, or having a "low credit risk" to Baa1, which delineates the company is now a "moderate credit risk."

Wells Fargo was cut from A1 to A2. The outlook on these ratings remains negative, according to Moody’s.

Still, Citigroup’s stand-alone credit has shown improvement, and Moody's confirmed the bank’s long-term rating.

During the recession, the government spent billions to keep large businesses from collapsing. Despite the nation’s economic state, Moody’s ratings indicate that fear of contagion and economic collapse has diminished.  

All three banks affected by the rankings were put on review in June, 2011. These downgrades may be a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is designed to stop governments from bailing out large financial firms and allowing them to fail in order to protect American taxpayers.

Following the announcements, shares of Bank of America and Wells Fargo dropped 5.8 and 2.9 percent, respectively.


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