Bank Stock Rally's Biggest Enemy (Update 1)

Updated to with additional information throughout..

NEW YORK (TheStreet) -- Bank of America(BAC), Citigroup(C), Morgan Stanley(MS), Goldman Sachs(GS) and JPMorgan(JPM) have a debt downgrade problem that could put a quick end to their 2012 stock rally.

After a big 2012 share surge for many big financial names, Thursday's announcement by ratings agency Moody's that it is reviewing big bank debt will be a harsh reminder to bank stock investors of the pessimism that swept over the sector last year following a string of sovereign and bank debt downgrades.

Credit ratings -- a key determinant for bank borrowing costs -- could cut into profit margins and recently revitalized bank balance sheets. If the ratings of banks continue a 2011 slide as agencies like Moody's, Standard & Poor's and Fitch Ratings reassess their earnings prospects and risk, the moves could begin costing serious money.

On Thursday, Moody's said that it is reviewing ratings cuts that could lead to a three notch drop for Morgan Stanley, a two notch drop for JPMorgan, Citigroup and Goldman Sachs and a one notch cut to Bank of America. While the prospective cuts would still keep the ratings of those banks at the investment grade level, if the moves were made by Moody's and matched by peer ratings agencies, Bloomberg reports that the cuts could cost those firms a combined $19 billion, according to compilations of disclosures on third quarter earnings.

That's because as bank ratings slide, bank trading counterparties may demand more collateral to compensate for an increasing credit risk.

Such increased capital costs would come at an inopportune time for investment banks and lenders with a significant exposure to the capital markets, which are in the midst of a big drop in trading and deal activity in 2012 to follow a weak second half of 2011. Ratings downgrades that make many of those businesses more expensive to run would be a double indemnity, as earnings suffer from a slow market.

For more on banks, see why struggling bank bull John Paulson dumped his holdings in America's largest banks.

On Thursday, the Wall Street Journal reported that in filings to the Federal Reserve, Bank of America indicated that it would sell its U.S. Trust wealth management unit if a severe downturn forced it to raise capital, though executives feel such a plan won't be needed and no negotiations are underway.

Separately, Goldman Sachs's buyout unit and private equity firm Advent International unveiled an acquisition of credit information service TransUnion for $3 billion. The business was previously owned by Chicago-based private equity firm Madison Dearborn Partners and the Pritzker family.