Moody's downgrade gives edge to safe-haven banks

Fri Jun 22, 2012 4:51pm EDT
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By Matt Scuffham and David Henry

LONDON/NEW YORK (Reuters) - Major ratings downgrades by Moody's will further divide the world's biggest banks based on their strength and access to cheap customer deposits.

The ratings, released Thursday by Moody's Investors Service, gave a competitive advantage to "safe-haven" banks that fund themselves with stable, low-cost customer deposits, while worsening the outlook for weaker banks that rely more on capital markets for their funding.

Stock and credit markets reacted mildly after Moody's cut the ratings of 15 of the world's biggest banks, as the cuts had been widely anticipated.

The cost of insuring against default for each of the five biggest U.S. investment banks fell on relief that Moody's was not harsher, said Otis Casey, research director at Markit in New York.

The KBW index of U.S. bank stocks rose 1.4 percent on Friday in New York. European bank shares rose 0.1 percent. Shares of New York-based Morgan Stanley were up 1.3 percent after initially jumping more than 3 percent in reaction to its rating having been cut less than feared.

Aside from the immediate market moves, the downgrades reinforce a trend that has seen weaker banks punished for their risk-taking, while stronger banks are rewarded for conservative funding models, ensuring lower costs and higher margins.

Not only will funding costs rise for the worst-rated banks, but trading partners are bound to ask for more collateral - and steer business to those perceived to be financially stronger.

"These downgrades will increase the cost of doing business for banks, either through reduced, or more costly, access to funding or the need to lodge extra collateral with creditors," said Daiwa Capital Markets analyst Michael Symonds   Continued...

A Moody's sign on the 7 World Trade Center tower is photographed in New York in this August 2, 2011, file photo. REUTERS/Mike Segar/Files