By:Â Steve Liesman, CNBC
The long-awaited downgrade of big banks by Moodyâ€™s highlights a raging debate among investors, regulators and politicians: Does the Dodd-Frank legislation end “too big to fail” or bake it into law?
The answer found in the Moodyâ€™s report is, unfortunately, both.
In downgrading some of the biggest U.S. banks â€”Â Bank of AmericaÂ [BACÂ Â 7.94Â Â Â Â 0.12Â Â (+1.53%)Â Â ],Â CitigroupÂ [CÂ Â 27.99Â Â Â Â 0.16Â Â (+0.57%)Â Â ],Morgan StanleyÂ [MSÂ Â 14.14Â Â Â Â 0.18Â Â (+1.29%)Â Â ]andÂ Goldman SachsÂ [GSÂ Â 93.63Â Â Â Â -0.27Â Â (-0.29%)Â Â ]Â â€” Moodyâ€™s specifically cited the changed outlook for a government support bailout in the event of a large bank failure. It specifically cited what it sees as the commitment of Federal Deposit Insurance to follow Dodd-Frank rules and end â€œbailouts of â€˜too big to failâ€™ institutions.â€
What Moodyâ€™s actually said in its report is: â€œPut simply, we believe government support for creditors of bankÂ holding companiesÂ is becoming less certain and predictable.â€
However, the ratings agency made a significant distinction between creditors to the holding companies and the operating companies, which is the actual bank that holds the deposits.
In the actual banks, Moodyâ€™s said: â€œSupport for creditors of operating entities remains sufficiently likely and predictable to warrant stable outlooks.â€ That is, Moodyâ€™s thinks the government will still bail out those creditors.
So thereâ€™s the rub: On the one hand, Moodyâ€™s sees the resolution plan in Dodd-Frank ending too big to fail by forcing creditors at the bank holding companies to take losses. On the other hand, it sees the regulators practically enshrining it in law by offering support to the operating company creditors.
â€œWeâ€™re still not sure if the resolution plan is workable, and there are competing priorities, which are at times irreconcilable,â€™â€™ Bob Young, Moody’s managing director of North America banking, said in an interview.
Regulators are trying to balance two competing interests. First, they want to avoid systemic risk and contagion while at the same time making creditors pay for a bankâ€™s losses so taxpayers are not on the hook.
To read more, visit:Â http://www.cnbc.com/id/47922304
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