JPMorgan Chase & Co. (JPM:US)’s credit-rating outlook was revised to negative by Standard & Poor’s, which said the likelihood of “extraordinary” government support for the largest U.S. banks is waning.
The outlook on JPMorgan’s long-term rating (JPM:US) of A was lowered from stable, S&P said today in a statement. That brings JPMorgan in line with the seven other “systemically important” banks including Bank of America Corp. and Goldman Sachs Group Inc., whose outlooks were held at negative. New York-based JPMorgan is the biggest U.S. bank, with $2.4 trillion in assets.
S&P may stop giving weight to the implied taxpayer support that has bolstered credit ratings at eight of the largest U.S. bank-holding companies. In the wake of the 2008 credit crunch, investors have assumed the federal government would bail out lenders in a renewed crisis because their failure would be catastrophic for the financial system.
“It is becoming increasingly clear that holding company creditors may not receive extraordinary government support,” S&P analysts led by Matthew Albrecht wrote in the statement. He cited the framework regulators are developing that could be used to dismantle and liquidate distressed banks.
S&P analysts believe that the U.S. government would still stand by the operating subsidiaries of the largest banks, Albrecht said on a conference call.
“Regulators are intent on asking holding-company creditors to absorb losses ahead of operating-company creditors, and they’re putting mechanisms in place that could make that more likely,” he said. “We don’t believe the U.S. government is becoming less supportive, simply less supportive to a certain class of creditors.”
If S&P entirely removed U.S. support from the credit rating of the bank-holding companies, it could result in a one- to two-level cut in their grades, he said.
JPMorgan’s shares dropped 0.9 percent to $53.90 at 11:52 a.m. in New York, compared with a 0.7 percent decline in the KBW Bank Index. Kristin Lemkau, a spokeswoman for the bank, didn’t respond to a request for comment.
S&P said it will review progress that regulators make on their new “orderly liquidation authority” as it determines whether to stop including government support in its bank ratings.
U.S. and U.K. regulators have been working on plans to allow large international banks to fail without damaging the rest of the financial system. The bankruptcy of Lehman Brothers Holdings Inc. in 2008 helped trigger a worldwide economic meltdown that threatened to destroy other global lenders.
“We may remove the ratings uplift we currently incorporate if we believe that regulators and lawmakers are increasingly likely to ask holding-company bondholders to bear losses in the event of a liquidation of a systemically important bank,” S&P said. “We currently believe those creditors will be supported to prevent the contagion of a crisis.”
Both the Bank of England and the Federal Deposit Insurance Corp. foresee that a wide range of unsecured creditors (JPM:US) could face losses during a bank’s failure, according to a paper released in December. Unsecured senior bondholders and uninsured depositors are among those who could take a financial hit, the paper said.
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