Financial ratings of european States by Moody's (Photo credit: Wikipedia)
To individuals who might be facing hard economic times like a bankruptcy, credit reports and their scores can be very important. Credit reports measure perceived economic reliability in debtors. A higher economic reliability can get you into a place to rent, provide a credit card for travel or car rental, and even increase your chances for landing certain jobs. But did you know that even banks get scored for economic reliability?
Moody’s and credit rating agencies like them, rate banks and their transactions similar to how a credit rating agency rates individuals.
According to recent news articles, Moody’s downgraded 15 banks in the United States, the United Kingdom, and Europe. The results of these downgrades was that the United States stock market took an immediate dip after hearing the news.
Four of the five largest banks in the United States received a two-notch downgrade. Bank of America was the only one of the five not receiving two notches, but since it was already near “junk” status, it received only one notch in the downward movement.
The results of downgrading banks is that the banks will have to post additional collateral in order to trade in derivatives, highly risky contractual instrument transactions. Derivatives were at the center of the U.S. Government bailouts for the banks back in 2008.
Led by Greenspan of the Federal Reserve, deregulation of the banking system began to occur during the 1980s. Derivatives, once part of the stock market exchanges, began being traded over the counter in unregulated venues. Recent regulation changes made by the Obama Administration is slowly beginning to change back how banks do business.
Moody’s and companies like them are beginning to follow the lead of our Government by clamping down on the economic violators using poor economic practices. These downgraded banks are now being shown to the public that they are not necessarily reliable banking institutions any longer. Moody’s even recently downgraded the United States bonds as well.
Just like when creditors are less likely to do business with you as a debtor if you have a poor credit report, you should beware of doing business with banks which have poor financial ratings. You can research banks ratings through Moody’s by going to this website: http://www.moodys.com/researchandratings
There is not too much to read into the downgrades of banks other than the fact that the banks have been hurt like the rest of us in the poor economic conditions. Banks, like any individual or business, can get into economic trouble. They can file bankruptcy like anyone else in America.
When banks do get into economic trouble, they normally pass their losses down to their customers like any other business will do, especially when they have a cash flow problem. Knowing that a particular bank is having problems might help you make an informed decision in whether you want to conduct business with that particular bank.
Providing a higher economic reliability promotes economic growth and financial well being. Measuring this reliability has been a useful tool for conducting business in America, and yes, even banks get scored for economic reliability.