{"id":30645,"date":"2012-07-04T13:37:26","date_gmt":"2012-07-04T17:37:26","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/07\/the-moodys-downgrade-hurts-some-banks-but-helps-others\/"},"modified":"2012-07-04T13:37:26","modified_gmt":"2012-07-04T17:37:26","slug":"the-moodys-downgrade-hurts-some-banks-but-helps-others","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/07\/04\/the-moodys-downgrade-hurts-some-banks-but-helps-others\/","title":{"rendered":"The Moody\u2019s Downgrade: Hurts Some Banks, but Helps Others"},"content":{"rendered":"

Article by Investment U<\/a> <\/p>\n

What\u2019s the premise behind this whole downgrading business?<\/p>\n

\u201cHindsight is 20\/20.\u201d<\/em><\/p>\n

\u201cFool me once, shame on you. Fool me twice, shame on me.\u201d<\/em><\/p>\n

We\u2019ve all heard these adages before \u2013 and so has Moody\u2019s. Let\u2019s go back to the mid-2000s\u2026<\/p>\n

There were a number of banks out there investing in a lot of things that rating agencies couldn\u2019t comprehend. Since there was an inability to assess risk, agencies such as Moody\u2019s gave AAA ratings to banks like coaches giving out trophies at a YMCA youth sports tournament \u2013everybody was a winner.<\/p>\n

We know the results of that process. Banks took on a lot of risk and didn\u2019t have the capital requirements to back it all up. It all hit the fan four years ago and rating agencies lost massive credibility.<\/p>\n

Last week, Moody\u2019s made the attempt to regain some of that lost prestige. But the markets basically told them, \u201cWe already knew this.\u201d Markets took little notice after Moody’s downgraded the ratings of 15 of the world’s largest banks. We all knew it was coming.<\/p>\n

So, was there anything new we learned from the latest downgrades?<\/p>\n

Dividing Banks into Three Tiers<\/strong><\/h2>\n

One of the biggest problems that wasn\u2019t addressed four years ago was how banks would deal with certain financial crises. Remember that the Federal Reserve did stress testing with some of the bigger banks a few months back to see how they would do against a European banking collapse and other economic fiascos. Well, Moody\u2019s looked at the same thing when it downgraded banks.<\/p>\n

With their ratings downgrades, Moody’s Investors Service further divided some of the world’s biggest banks. The divisions are based on each bank\u2019s strength and if it can weather storms with access to cheap customer deposits. And this makes sense.<\/p>\n

“Safe haven” banks are those institutions that fund themselves with steady retail deposits rather than the climate in capital markets. Moody’s designated its highest ratings to three safe havens \u2013 HSBC<\/strong> (NYSE: HBC), Royal Bank of Canada <\/strong>(NYSE: RY) and JPMorgan <\/strong>(NYSE: JPM) \u2013 because it argued that these three are protected by their deposits and thus have an edge to absorb hits better than their peers.<\/p>\n

A new trend that evolved after the banking crisis is weaker banks with less \u201cshock absorbers\u201d getting hammered for taking risk. Meanwhile, stronger banks are rewarded for being more conservative, guaranteeing lower costs and greater margins.<\/p>\n

Those banks with <\/strong>lower ratings will not only see their cost of business increasing (i.e. through reduced access to funds or by paying more for funding), but could see trading partners ask for more collateral. Most likely, you\u2019ll see a lot of business guided to banks that the market perceives as stronger. If you\u2019re a bank that\u2019s severely dependent upon markets for funding, the lower your rating, the harder it is to get that funding because of the debt crisis in Europe and the worldwide economic slowdown.<\/p>\n

Just in case you’re curious, there were three tiers of strength. I\u2019ve talked about some the strongest, but there\u2019s the middle tier. Moody\u2019s said these banks depend on unreliable capital market revenues to make shareowners happy. Goldman Sachs<\/strong> (NYSE: GS) fell into this group.<\/p>\n

The last group is those that had been roughed up by their risk management and\/or have \u201cshock absorbers\u201d not up to par with their banking peers. Morgan Stanley <\/strong>(NYSE: MS), Bank of America <\/strong>(NYSE: BAC) <\/strong>and Citigroup<\/strong> (NYSE: C) <\/strong>were all placed here.<\/p>\n

Downgrades May Be An Opportunity for Regional Banks<\/strong><\/h2>\n

People yelled that these banks were too big to fail. But what about all the other banks? How are they affected by Moody\u2019s rate cuts?<\/p>\n

That\u2019s a good question, because there should be an opportunity here. Enter the big regional banks such as:<\/p>\n