Friday, 19 December 2008

S&P Cuts Ratings of 12 Major U.S. and European Banks

Today Standard and Poor's announced downgrades and rating outlook changes to the credit debt rankings of 12 major U.S. and European banks. As a result, European bank shares plunged today. 

The rating cuts follow almost $800 billion of credit-related writedowns and losses at banks around the world (the data comes from Bloomberg and other news agencies.) Commercial banks are facing unprecedented stress as they have become more reliant on central bank liquidity and the interbank lending market paralysed since the collapse of Lehman Brothers in September. One thing that surprised is that this move didn't come before -- one wonders why these rating companies are so slow to reassess credit risk when it is evident that the financial industry model is bound for a collapse in almost every developed economy.    

The ratings company says the decision reflects its view on higher industry risk and the impact of the global recession on the quality of their balance sheets, loan portfolios and investments. S&P says there will be more volatility in financial markets in the months ahead, and that wholesale funding for global lenders will be more likely to become costlier and scarce. One interesting aspect of all this is that S&P will from now on emphasise more on measures to rate banks' risk-adjusted capital data. This is especially important, because it indicates that rating companies will be more careful to assess the risks stemming from the industry's exposure to private equity and similar activities.

On the other hand, S&P seems quite supportive and optimist over government intervention on the sector. The company applauded recent moves by central banks around the world in providing banks with greater access to primary funds.  ``For the first time,'' said the S&P statement, ``we are recognising this extraordinary support for certain banks in the U.S.''

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