Tags: S&P | Obama | Downgrade | Banks

S&P: Obama Reform Plan Puts U.S. Banks at Risk of Downgrade

Wednesday, 03 Feb 2010 07:26 AM

A White House proposal to curb excessive risk-taking by banks has sparked fears it could crimp banks' access to funding, which Standard & Poor's said might cause it to downgrade its U.S. banking system assessment.

The biggest fear is that new regulations on risk-taking could expose bank bondholders to a greater chance of losses, which would undermine the attractiveness of bank bonds, said Tanya Azarchs, managing director, financial institutions ratings, with Standard & Poor's in New York.

Legislation "could be detrimental to bondholders and could affect the BICRA rating further," Azarchs said Tuesday on a panel debate at an S&P conference on banking in New York.

The BICRA, or banking industry country risk assessment, reflects the chances that a country's banking system may experience a systemic failure, Azarchs said.

It is one of several factors S&P considers when determining a country's credit rating.

S&P had revised down its BICRA on the United States to Group 3 from Group 2 on Dec. 21 due to a higher estimate of the banking sector's gross problematic assets.

The BICRA ratings range from a high of 1 to a low of 10. Other banking systems ranked 3 include the United Kingdom, Austria, Chile, Portugal and Saudi Arabia.

The risk of the U.S. credit culture in which consumers borrowed heavily during the boom years via mortgages and credit cards "has proven to be a lot higher than we thought," Azarchs said.

S&P's comments came as White House economic adviser Paul Volcker on Tuesday urged Congress to rein in risky investing by big banks.

However, depending on what turn banking laws take, they could conversely strengthen S&P's banking assessment.

The U.S. BICRA score could be raised, said Azarchs, if legislation were to result in greater capitalization of U.S. banks.

A BICRA assessment is separate and distinct from S&P's sovereign ratings, although it is one of several factors, including fiscal policy, the currency and labor markets, that the agency takes into account when assessing a government's debt, said Nikola Swann, S&P's associate director of sovereign ratings.

S&P still assigns the United States a top triple-A rating and a stable outlook, meaning there is not a significant chance of a change in the near future, Swann said.

However, the agency does not seek to underplay those weaknesses of the U.S. sovereign that could cause long-term problems, he added.

"You do have significant fiscal deficits," said Swann, "and the path to bring those deficits under control is uncertain."

President Barack Obama on Monday proposed a budget that foresees a record deficit of $1.56 trillion, or more than 10 percent of gross domestic product, this year. That's proportionally the biggest deficit since 1945.

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A White House proposal to curb excessive risk-taking by banks has sparked fears it could crimp banks' access to funding, which Standard Poor's said might cause it to downgrade its U.S. banking system assessment. The biggest fear is that new regulations on risk-taking...
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2010-26-03
Wednesday, 03 Feb 2010 07:26 AM
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