Moodys Investors Service has lowered the credit ratings on some of the worlds biggest banks,including Bank of America,JPMorgan Chase and Goldman Sachs,reflecting concern over their exposure to the violent swings in global financial markets.
The downgrades late Thursday ultimately are a measure of Moodys view on the ability of the banks to repay their debts. The ratings agency also cut its ratings on Barclays,Deutsche Bank and HSBC,some of the largest banks in Europe.
The banks have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities, Moodys global banking managing director Greg Bauer said in a statement outlining the rationale for the downgrades.
The behemoth banks are all major players in the global stock and bond markets,which have become extremely volatile. Critics such as former US Federal Reserve Chairman Paul Volcker argue that the stability of the financial system is threatened when banks profits rely on proprietary trading desks that make high-risk bets on derivatives and other opaque financial instruments. Rich profits can be made from such trades but the losses can also be huge.
JPMorgan said last month it suffered a $2 billion trading loss related to a hedging strategy.
Analysts said the lure of larger profits from riskier,highly leveraged trading may prove too tempting compared with traditional banking such as loans for housing or small businesses,
The trade-offs for Western banks,purely from a profitability perspective,may favour the prop desk and trading and hedging, said Anand Pathmakanthan,who analyzes Singapore-based banks for Nomura Equity Research.The banks here in Asia are much more fundamentally sound and much easier to understand than say,Citigroup or JPMorgan,which events have shown,nobody really knows whats going on there.
Bauer,of Moodys,said that some banks,including JPMorgan and HSBC,have reliable buffers in more stable businesses that could act as shock absorbers during a crisis.