"All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities," said Mr Greg Bauer, Moody’s global banking managing director on Thursday. However, they also engage in other, often market leading business activities that are central to Moody’s assessment of their credit profiles, he said.
"These activities can provide important ‘shock absorbers’ that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges," Mr Bauer said.
According to the Wall Street Journal, the move hit five of the six biggest US banks by assets, including Morgan Stanley, which had mounted a campaign to persuade Moody’s not to cut its rating by three notches. It was downgraded instead by two. The other banks are Bank of America, Goldman Sachs, JPMorgan, Morgan Stanley, Citigroup and Deutsche Bank.
Moody’s said rating actions concluded the review initiated on 15 February, 2012 when it announced a ratings review prompted by its reassessment of the volatility and risks that creditors of firms with global capital markets operations face.
In the past, these risks have led many institutions to fail or to require outside support, including several firms affected by today’s rating actions, it said.
In a statement, Moodys said the first group of firms included HSBC, Royal Bank of Canada and JPMorgan. Capital markets operations (and the associated risks) are significant for these firms.
However, Moody’s added that these institutions had stronger buffers, or "shock absorbers", than many of their peers in the form of earnings from other, generally more stable businesses. This, combined with their risk management through the financial crisis, has resulted in lower earnings volatility.
The rating agency said capital and structural liquidity were sound for this group, and their direct exposure to stressed European sovereigns and financial institutions was contained.