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Brown-Vitter Bill May Have Negative Ratings Impact For Banks: S&P

Banks are unlikely to be able to raise that much capital from the markets, given the tremendous dilution and lower return on equity, and will be forced to break up or deleverage. This could spark a credit crunch, the analysts fear, which could cause an economic downturn that would further hurt banks.

The rejection of the Basel III Capital rules is also of concern to the analysts because it might leave the U.S. banks on an "uneven playing field vis-à-vis their global peers."

TheStreet's Philip van Doorn has a more detailed critique of the proposed legislation.

The bill will however succeed at one level. It might help to eliminate the perception that some banks are too big to fail, which allows those banks to get an implicit subsidy from the market.

"Whether the largest banks become smaller because of breaking up or deleveraging, we will assess the ongoing interconnectedness of these entities and determine whether they would still be classified as highly systemically important under our criteria. Should we conclude that these banks are no longer highly systemically important we would likely not factor support into our ratings," the report said."However, higher capital could, in some instances, offset the loss of uplift of support on the issuer credit rating."

-- Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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