Moody's Cuts Outlook on Big Banks

NEW YORK (TheStreet) -- Moody's Investor Service has lowered its outlook on three of the big money-center banks, saying financial reform will eventually diminish the benefit of the implied government backstop the institutions have enjoyed since the crisis.

Late Tuesday, the rating agency affirmed its long- and short-term ratings on Bank of America(BAC), Citigroup(C) and Wells Fargo(WFC), but cut its outlook on the ratings to negative from stable, citing "the recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) -- a law that, over time, is expected to result in lower levels of government support for U.S. banks."

Moody's also placed the ratings of 10 regional banks under review for possible downgrade for similar reasons. Companies impacted by this action included BB&T Corp.(BBT), Capital One(COF), Fifth Third Bancorp(FITB), KeyCorp(KEY), and PNC Financial Services(PNC), among others.

In a press release announcing its action on Bank of America, Citigroup and Wells Fargo, Moody's estimates that the banks have seen their debt and deposit ratings inflated by between 3 and 5 notches by the implied government support. Moody's added, however, that it was leaving the ratings intact for now because it will take a while for the changes from the legislation to be felt.

"Over the near-term, as a practical matter, Moody's thinks that regulators will continue to face significant obstacles when trying to resolve complex, interconnected, global firms without risking a systemically threatening contraction in credit," the ratings agency said. "Therefore, we continue to believe the current ratings on these three banks are still appropriate."

Moody's gave a 12-to-24 month timeline for how long it will take for its support assumptions to lessen, meaning the banks could see downgrades within that stretch if the ratings agency's view of their own intrinsic strength doesn't keep up with its perception of the impact of less government support.

The ratings agency also noted its rating outlook is already negative for JPMorgan Chase(JPM), Goldman Sachs(GS), Morgan Stanley(MS), and State Street(STT), which are four of the five other U.S. banks it believes are "systemically important, complex, and interconnected."

The fifth additional bank is Bank of New York Mellon(BMY), which Moody's still has a stable outlook for, arguing that its ratings don't reflect as much implied government support as those of the other banks at the current time.