Moody’s Investors Service downgraded several key U.S. banks late Thursday, possibly impacting municipal bonds.
Five of the 15 banks and securities firms downgraded have significant involvement in the U.S. municipal bond market.
Specifically, Moody’s downgraded JPMorgan Chase & Co., Bank of America Merrill Lynch, Citigroup, Morgan Stanley, and Goldman, Sachs & Co. It also lowered the boomon some major foreign banks.
In February, Moody’s had placed a broad range of banks with global capital market operations and European banks on review for downgrades. In May, it released new ratings for banks in certain European countries. Late Thursday, it released new ratings for banks with global capital market operations, including many of the biggest U.S. banks.
Moody’s has warned that downgrades to some of these banks could have a negative impact on municipal securities. About $60 billion of debt could be affected, the agency said.
The possible downgrades would stem from a variety of connections between the banks and their securities. Some of the potential downgrades would be for securities whose ratings are based solely on the banks’ support, usually in the form of a letter of credit.
In April Moody’s stated that a downgrade of some of the large banks could adversely affect variable-rate demand bonds.
VRDBs are long-term securities with short-term interest rates because investors can withdraw their money with little notice. Banks guarantee the VRDBs.
Bank of America provides credit support for $35 billion of the short-term municipal credits that Moody’s rates, said Thomas Jacobs, Moody’s senior credit officer. This makes it the second-largest credit provider for short-term credits rated by Moody’s, behind JPMorgan.
Money market funds generally invest in credits rated at what is called the “tier 1” level. Moody’s as threatened lowered Bank of America’s operating company from its tier 1 P-1 rating to a sub-tier 1 rating.
There has been some disagreement among experts as to whether Moody’s downgrade alone would threaten money market use of VRDBs supported by Bank of America’s credit.