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The Associated Press July 27, 2010, 7:25PM ET

Moody's: Regional banks on review for downgrade

Moody's Investors Service said Tuesday that it is reviewing the ratings of 10 large regional banks for possible downgrades because of a new law that will likely lower the possibility of government bailouts.

The banks under review are subsidiaries of BB&T Corp., Capital One Financial Corp., Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc., Popular Inc., Regions Financial Corp., SunTrust Banks Inc., U.S. Bancorp and Zions Bancorp.

In a note to investors, analyst Robert Young said Moody's had previously factored in the assumption of extraordinary government support into the banks' ratings last year when the banking system was in turmoil.

Now a new law, the Wall Street Reform and Consumer Protection Act, drastically reduces the probability of taxpayer-funded bailouts for the banks if they run into trouble, Young said.

Young said Moody's will take into account banks' size and importance when evaluating how much government support the institution might get in a crisis.

The specific ratings being reviewed have benefited from upgrades since last year because of Moody's increased expectation of government.

None of the banks' financial strength ratings are on review, because those ratings hadn't previously benefited from the assumption of government support.

The extent of the possible downgrades would only reflect the ratings boosts the banks got as a result of Moody's assumed government support. For example, eight of the banks got a one-notch ratings lift as a result of government support, so their ratings would only fall by the same amount, if at all.

Young noted that the government has a financial stake in six of the regional banks on review: Fifth Third, KeyCorp, Popular, Regions, SunTrust and Zions.

In a separate action, Moody's lowered its outlook to "negative" from "stable" on ratings of Bank of America, Citigroup and Wells Fargo, also because of the new law.

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