Is There More Risk to Large Banks?

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Nov. 15 (Bloomberg) -- Moody's downgrade of four U.S. banks, which cited a lower potential level of government support, may have ramifications for the euro zone. Bloomberg's Laura Marcinek reports on Bloomberg Television's "Money Moves. (Source: Bloomberg)

What is behind this downgrade?

There are two things going on.

The moody's analyst looked at two different things.

The first thing they looked at was the likelihood the creditor would get government backing if the bank were to go under.

That is diminished now, because we have this mail in strategy that regulate his are looking at where any losses on the bank would be imposed on the creditors and they would not use taxpayer money.

The other side of it is -- that is one force operating in one direction, and the other force operating in the other direction is the idea was if there were this failing situation, creditors might actually get more than in a bankruptcy situation.

There are two opposing forces, and depending on how that plays out.

That is why four of these banks got downgraded.

And why citibank and wells fargo did not.

And that is why according to their analysis, according to their creditors, if the bank went under or there was this failing scenario, creditors would actually make more if the banks went under.

It is possible they could make more in this bail-in situation.

It would be a little bit of a mess, but maybe some organized chaos.

And these creditors could actually walk away with more than with a bankruptcy.

If you look at how stocks are reacting, not a lot moving.

Moody's downgrade the banks, and yet the stocks, we're not seeing a lot.

Exactly.

Moody's told us in august they would be reviewing these banks.

They made their announcement yesterday afternoon and the market sort of shrugged it off.

They said three months ago that they would be doing this.

And it is not as if these banks are in imminent risk.

Exactly.

It just means they are adding a little bit more risk to hold in the company's debt.

Because if they were to go under, the government might not be there to support them.

At least not using taxpayer bailout.

We have talked with various analysts and investors about the overhang on the banks from regulatory risk.

Is this another reminder of that?

Absolutely.

I talked to a couple of moody's analyst last night who said that one of the reasons why bfa and citi were not as effective is because they are getting a lot of this overhang of the risk.

Thank you so much.

This text has been automatically generated. It may not be 100% accurate.

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