Tags: Moodys Slow Growth | New Rules Harm Bank Outlook

Moody's: Slow Growth, New Rules Harm Banks' Outlook

Friday, 13 May 2011 07:28 AM

Moody's Investors Service said the U.S. banking industry remains challenged by the sluggish real estate market, new rules that might shrink bank profits and slow overall economic growth.

The credit rating agency, based in New York, said Thursday that the sector's outlook remains "negative" despite some improvements around the margins.

"The tepid economic recovery coupled with limited job growth undermine the likelihood of a return to normalcy by putting pressure on home prices, consumption, and investment," said co-author and Moody's Senior Vice President Sean Jones.

Jones added that the financial overhaul passed by Congress last year might also weigh on bank earnings, forcing them to lend less and conserve cash to boost their capital buffers.

One reason for the negative outlook, Moody's said, is the possibility that banks will need another round of bailouts to increase their capital. That's less likely because of the government's temporary stimulus spending and the Federal Reserve's program to boost the economy by buying $600 billion in Treasury bonds, Moody's said.

The agency said the loans on banks' books remain weak, but are slowly being written down as the recovery gains strength.

If Gross Domestic Product grows between 2.5 percent and 3.5 percent in 2011 and 2012, banks will be able to absorb the losses from any remaining bad loans and boost their capital voluntarily.

The report notes that some of the biggest banks will generate lower profits because of the planned overhaul of the derivatives market. Many derivatives were traded outside the view of regulators before the financial crisis. Once the new rules take effect, most will be traded in clearinghouses and on exchanges.

Derivatives had been "an important contributor to profitability," Moody's said.

The assessment came in an annual report from Moody's called "United States Banking System Outlook."

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Moody's Investors Service said the U.S. banking industry remains challenged by the sluggish real estate market, new rules that might shrink bank profits and slow overall economic growth. The credit rating agency, based in New York, said Thursday that the sector's outlook...
Moodys Slow Growth,New Rules Harm Bank Outlook
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2011-28-13
Friday, 13 May 2011 07:28 AM
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