Tags: Moody | Financial | Reform | modest | positive | banks

Moody's: Financial Reform a 'Modest Positive' for Banks

Tuesday, 27 Jul 2010 09:41 AM

Moody's Investors Service said that it expects the nation's new law overhauling financial regulations will strengthen ratings of banks and other institutions over the long haul.

But Moody's said debt and deposit ratings could come under pressure if government support measures for financial institutions are removed at a faster pace than banks can improve their financial strength.

"The ultimate intent of the resolution authority of the law is clear, which is to impose greater market discipline and reduce government support," said Robert Young, Moody's managing director for North American bank ratings.

The legislation that cleared Congress and became law last week targets risky banking and oversight failures that led to the financial crisis in late 2008 and early 2009. Fears of collapse led the government to step in with taxpayer-financed bailouts for many banks.

Young said the law "will prove to be a modest positive for the stand-alone strength of U.S. banks by compelling them to act in the interest of financial stability."

Moody's said it expects the bank financial strength ratings that it assigns "will improve over time as a net result of these changes, banks' capital raises, and as the large markdowns and credit loss provisions taken over the past few years come to an end. Unsupported bank financial strength ratings are not, however, likely to return to pre-crisis levels."

Over the next 12 to 24 months, Young said he expects government support "will revert to pre-crisis levels or even lower."

The government will become less willing to extend support to troubled banks, he said.

"But we do not anticipate that we will completely eliminate the assumption of support from the senior debt and deposit ratings of systemically important banks," Young said.

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