Fitch Could Downgrade Dozens of Banks After Debt-Ceiling Saga
Key takeaways
- Credit rating agency Fitch is in talks to downgrade the U.S. banking sector
- The move could trigger lower ratings for JPMorgan Chase and the Bank of America if it goes ahead
- Bank stocks fell across the board as concerns weighed on share prices
Credit rating agency Fitch is rumored to be considering downgrading dozens of American banks’ statuses in a move that questions the health of the U.S. economy. With Moody’s already setting the precedent last week, another downgrading could scupper the Fed’s plans of bringing inflation in line. Here’s the lowdown.
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Why is Fitch downgrading banks?
Fitch Ratings is said to be looking at implementing downgrading vast swathes of the banking sector that could even include the top dogs like JPMorgan Chase and Bank of America.
If Fitch decides to downgrade the entire sector, it will leave top banks with higher ratings than their environment, triggering dozens of downgrades in a financial domino effect.
The rating agency had already downgraded the U.S.’ financial health in June, citing the debt-ceiling crisis and political instability as reasons for the shift. But Fitch wouldn’t be the first to make a move — Moody’s downgraded ten small and mid-sized banks last week and said to be looking at 17 more lenders.
A downgrade could impact the Fed’s monetary tightening policy, with higher interest rates adding further pressure onto a weakened banking sector. Downgraded banks would need to pay investors more to buy their bonds, potentially sliding profit margins.
What was the market reaction?
The rating news came at the same time the chairman of the Federal Deposit Insurance Corporation, Martin Gruenberg, said in a speech earlier this week that the agency intended to introduce tighter regulation to prevent more banks from failing. The “living wills” concept would ask regional banks to provide detailed plans on what happens if they collapse.
Needless to say, banking stocks didn’t do well. JPMorgan shares declined nearly 4% at the news, the Bank of America’s share price slid over 3% and Citigroup fell 2%. The S&P Banking Index closed 2.5% down, its lowest level in a month, and the KBW Bank Index dipped 2.75%.
The bottom line
A Fitch downgrading isn’t a done deal by any means, but the headwinds aren’t looking great right now for the big banks. It’s even more reason for the U.S. government to think of ways how the debt-ceiling crisis can never happen again — because the economic impacts are far too real.
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