Moody's: US more likely than ever to let a big bank fail

Moody’s has downgraded its credit ratings for three major US banks – Bank of America, Wells Fargo, and Citigroup – arguing that the US government is ‘more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute.’

Moody’s cut Bank of America Corporation’s (BAC) two levels to Baa1 from A2, with the outlook still remaining negative.

While Moody’s believes that BAC has made progress in improving its capital and liquidity positions, the downgrade reflects the risks that continue to be presented by the bank’s exposures in its mortgage business.

Wells Fargo’s senior debt was downgraded to A2 from A1, a smaller drop compared to BAC, while Citigroup’s short-term rating was dropped to Prime-2 from Prime-1.

Moody’s explained the rationale behind its decision: ‘Now, having moved beyond the depths of the crisis, Moody's believes there is an increased possibility that the government might allow a large financial institution to fail, taking the view that contagion could be limited.’

US Representative Barney Frank, the co-author of the Dodd-Frank Act that ushered in greater financial regulation, said that the decision was the right thing to do given ‘the extent that they were rating the banks because they were too big to fail, they were wrong.’ Frank has said previously criticised the ratings agencies for believing the government would rush to the aid of collapsing firms.