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Moody's Sees 'Progress' on 'Too Big To Fail'

NEW YORK ( TheStreet) -- Moody's Investors Service (MCO) completed ratings reviews of eight 'Too Big To Fail' U.S. banks on Thursday, stating creditors of the giant institutions should not expect the government to step in and shield them from losses, as happened in 2008.

Analysts at the credit ratings agency, which saw its own reputation take a beating during the crisis, cited "the ongoing progress of US bank regulators in developing an effective resolution framework for large, complex banks."

Specifically, Moody's analysts pointed to a feature of the 2010 Dodd Frank legislation known as the Orderly Liquidation Authority, which "would impose losses on US bank holding company creditors to recapitalize and preserve the operations of the group's systemically important subsidiaries in a stress scenario. As a result, the holding company creditors of systemically important US banks are unlikely to receive government support, signaling a higher risk of default. Our ratings on holding company debt therefore no longer benefit from 'lift' as a result of assumed government support," Moody's stated.

While the "Too Big To Fail" fix was the main reason for the review, the analysts nonetheless looked at individual factors for the different banks, issuing various upgrades and downgrades to different types of debt at the different institutions, leading to some surprising results.

Two of the banks that received the biggest official government bailouts following the 2008 crisis - Citigroup (C) and Bank of America (BAC - Get Report) both benefitted from upgrades, while two banks widely believed to have come through the crisis with their balance sheets, if not their reputations, intact -- JPMorgan Chase (JPM - Get Report) and Goldman Sachs (JPM - Get Report) -- were downgraded. Despite those actions, the parent companies of both JPMorgan and Goldman remain higher-rated by Moody's than those of Bank of America or Citigroup.

In upgrading credit ratings for Bank of America's U.S. banking subsidiary, Moody's analysts cited "the bank's improved capital position, reduced tail risks, and declining expenses." It also praised Bank of America for reaching several legal settlements, while noting it remains exposed to additional legal risk and still needs to generate consistent earnings.

In an apparent allusion to the ouster of former CEO Vikram Pandit in favor of current chief Michael Corbat, Moody's praised Citigroup's efforts to install "a more conservative risk management culture and a more independent risk control function."

The other banks addressed in the report were Wells Fargo (WFC), Morgan Stanley (MS) BNY Mellon (BK) and State Street Corp. (STT).

-- Written by Dan Freed in New York.

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

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