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U.S. Banks Brace for a Tough 2008

Credit and liquidity concerns will weigh on the sector, says S&P Ratings, but weaker earnings won't necessarily translate into lower ratings

The fourth quarter of 2007 was difficult for many financial institutions, and the ensuing months will continue to test the sector, perhaps significantly so, depending on the length and depth of the economic slowdown. With the rapid speed at which events have unfolded since last summer, earnings aren't the only story anymore.

Credit and liquidity problems have quickly developed as significant factors affecting issuers and investors. The speed at which they have become apparent and their severity have taken market participants by surprise, although Standard & Poor's Ratings Services was aware for some time that certain risks were piling up waiting for the right moment to bring things crashing down. Fortunately, many financial institutions entered this down cycle from a position of strength. But as the dislocation becomes protracted, they're clearly using that strength up.