DOWNGRADE-MAGEDDON 2012: Here Are The Gigantic Banks On Moody's Chopping Block

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Moody’s announced a blanket review of 17 banks that operate in global capital markets back on February 15th. Moody’s rationale, from the announcement:

“These firms face challenges that are not fully captured in their current ratings. Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.”

Downgrades on these major banks would have a serious reputational and financial impact. Many banks engage in derivatives contracts with counterparties that require additional collateral in the event of a downgrade, or have costly termination clauses.

So far, two of the 17 banks listed have been downgraded. Nomura was cut by one notch to Baa3 on March 15 and Macquarie saw its ratings slashed by two notches to A3 on March 16.

With the majority of the potential downgrades expected this month, we give you all the details on which banks could lose out—and how much they’ve estimated they could lose—if Moody’s takes the axe to their ratings.

Bank of America

Current rating: Baa1

Downgrade guidance from Moody's: 1 notch

Possible new rating: Baa2

Potential damage: $3.5 billion

From Bank of America's 10-Q filing:

At March 31, 2012, if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch, the amount of additional collateral contractually required by derivative contracts and other trading agreements would have been approximately $2.7 billion comprised of $2.1 billion for BANA and approximately $539 million for Merrill Lynch and certain of its subsidiaries. If the agencies had downgraded their long-term senior debt ratings for these entities by a second incremental notch, an incremental $2.4 billion in additional collateral comprised of $1.8 billion for BANA and $646 million for Merrill Lynch and certain of its subsidiaries, would have been required.

Also, if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch, the derivative liability that would be subject to unilateral termination by counterparties as of March 31, 2012 was $3.3 billion, against which $2.5 billion of collateral had been posted. If the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries a second incremental notch, the derivative liability that would be subject to unilateral termination by counterparties as of March 31, 2012 was an incremental $5.0 billion, against which $4.7 billion of collateral had been posted.

Royal Bank of Scotland

Current rating: A2

Downgrade guidance from Moody's: 1 notch

Possible new rating: A3

Potential damage: RBS officials estimated that a one-notch downgrade could force it to raise as much as £12.5 billion ($19.4 billion) in collateral.

Societe Generale

Current rating: A1

Downgrade guidance from Moody's: 1 notch

Possible new rating: A2

Estimated collateral costs unavailable.

Barclays

Current rating: Aa3

Downgrade guidance from Moody's: 2 notches

Possible new rating: A1

Estimated collateral costs unavailable.

BNP Paribas

Current rating: Aa3

Downgrade guidance from Moody's: 2 notches

Possible new rating: A1

Estimated collateral costs unavailable.

Citigroup

Current rating: A3

Downgrade guidance from Moody's: 2 notches

Possible new rating: Baa2

Potential damage: If the downgrade is confined to Moody's alone, derivative triggers and collateral requirements would total $1.1 billion

From Citigroup's 10-Q:

As of March 31, 2012, Citi estimates that a hypothetical two-notch downgrade of the senior debt/long-term rating of Citigroup across all three major rating agencies could impact Citigroup's funding and liquidity due to derivative triggers and exchange margin requirements by approximately $2.1 billion. Of the $2.1 billion, $0.5 billion could result from a potential two-notch downgrade by Moody's only. Other funding sources, such as secured financing transactions and other margin requirements, for which there are no explicit triggers, could also be adversely affected.

In addition, as of March 31, 2012, Citi estimates that a hypothetical two-notch downgrade across all three major rating agencies of Citibank, N.A.'s senior debt/long term rating could impact Citibank, N.A.'s funding and liquidity due to derivative triggers and exchange margin requirements by approximately $2.6 billion. Of the $2.6 billion, $0.6 billion could result from a potential two-notch downgrade by Moody's only.

Accordingly, in total, Citi estimates that a two-notch downgrade of Citigroup and Citibank, N.A., across all three major rating agencies, could result in aggregate cash obligations and collateral requirements of $4.7 billion. Of this amount, approximately $1.1 billion could result from a potential two-notch downgrade by Moody's only of both Citigroup and Citibank, N.A.

Credit Agricole

Current rating: Aa3

Downgrade guidance from Moody's: 2 notches

Possible new rating: A2

Estimated collateral costs unavailable.

Deutsche Bank

Current rating: Aa3

Downgrade guidance from Moody's: 2 notches

Possible new rating: A2

Potential damage: In an annual report published earlier this year, Deutsche Bank estimated that a two-notch downgrade to A2 could open up a 'cumulative funding gap...over an eight-week horizon' of €168 billion. This does not include counter-measures, which it suggested would amount to €246 billion.

Goldman Sachs

Current rating: A1

Downgrade guidance from Moody's: 2 notches

Possible new rating: A3

Potential damage: According Goldman Sachs's 10-Q filing, the company could be forced to raise up to $6.8 billion for collateral and termination payments.

HSBC

Current rating: Aa2

Downgrade guidance from Moody's: 2 notches

Possible new rating: A1

Estimated collateral costs unavailable.

JP Morgan

Royal Bank of Canada

Current rating: Aa1

Downgrade guidance from Moody's: 2 notches

Possible new rating: Aa3

Potential damage: Information on the impact of a two notch downgrade from Moody's was unavailable, but in the event of a theoretical five notch downgrade (which is not being considered by Moody's), an additional $3.2 billion in collateral would have to be posted.

*An earlier version of the article quoted the wrong figure for RBC's exposure to a Moody's downgrade. Our apologies for the error.

From Royal Bank of Canada's 40-F:

Please note that this filing refers to a theoretical five notch downgrade of RBC's credit rating, not the Moody's downgrade alluded to in the article.

Certain derivative instruments contain provisions that link our collateral posting requirements to our credit ratings from the major credit rating agencies. If our credit ratings were to fall, certain counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing overnight collateralization on net derivative liability positions. The aggregate net fair value of all derivative instruments with collateral posting requirements that are in a net liability position on October 31, 2011, is $18.8 billion (October 31, 2010 -- $18.3 billion) for which we have posted collateral of $15.3 billion (October 31, 2010 -- $14.9 billion) in the normal course of business. If our credit ratings had been downgraded to BBB on October 31, 2011, we would have been required to post an additional $3.2 billion of collateral (October 31, 2010 -- $2.7 billion) to the counterparties of these contracts. If our credit ratings were to fall below BBB, we do not expect that the additional collateral that we would be required to post would be material.


Credit Suisse

Current rating: Aa2

Downgrade guidance from Moody's: 3 notches

Possible new rating: A2

Potential damage: In the event of a three notch downgrade, Credit Suisse would require CHF 4.5 billion (about $4.73 billion) to post collateral and pay termination fees.

From Credit Suisse's 20-F:

A downgrade in credit ratings could reduce our access to capital markets, increase our borrowing costs, require us to post additional collateral or allow counterparties to terminate transactions under certain of our trading and collateralized financing and derivative contracts. This, in turn, could reduce our liquidity and negatively impact our operating results and financial position. Our liquidity barometer takes into consideration contingent events associated with a two notch downgrade in our credit ratings. The impact of a one, two and three-notch downgrade in the Bank's long-term debt ratings would result in additional collateral requirements or assumed termination payments under certain derivative instruments of CHF 1.8 billion, CHF 3.8 billion and CHF 4.5 billion, respectively, as of December 31, 2011, and would not be material to our liquidity and funding planning. As of the end of 2011, we were compliant with the requirements related to maintaining a specific credit rating under these derivative instruments.


Morgan Stanley

UBS

Current rating: Aa3

Downgrade guidance from Moody's: 3 notches

Possible new rating: A3

Potential damage: Reuters reports that a 3 notch downgrade would require UBS to put up CHF 7 billion (around $7.3 billion) in collateral.


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