This week, ratings agency placed eight large banks on “credit watch negative” after a decision made by the US Federal Reserve, which meant that if there was a future crisis, the government would be hesitant about helping them.
The decision that the Federal Reserve came to last week was that in order to operate securely, large banks should adopt another buffer and become “too big to fail”. According to Fed officials, $120 billion needs to be raised to meet the new requirements and this should reduce risk, derailing markets or needing taxpayer money, CNBC reports.
CNBC also revealed that the banks that this would apply to include Wells Fargo, Goldman Sachs, State Street and Morgan Stanley, but the Fed believes that six of the eight banks would not be able to comply with the new rules.
Federal Governor Daniel Tarullo announced in a statement last week that this decision would be effective. “By making the failure of even the largest banks more manageable, the proposed regulation will be another important step in solving the too-big-to-fail problem,” Tarullo said.
Being on “credit watch negative” results in a 50% chance that the banks’ ratings will be cut within the next three months, CNBC explains. “S&P plans to conclude a review by year-end to determine whether it should continue to incorporate “extraordinary government support” in its ranking for systemically important banks – those who collapse could damage the US or global economy.
S&P made a statement at the end of last week which highlighted that US regulators have made progress and their plans are increasingly clearer about how to resolve future issues. “The action reflects our belief that US regulators have made further progress and provided more clarity in enhancing their plans for resolving systemically important institutions – lowering the probability that the US government would provide extraordinary support to these institutions to enable them to remain viable,” S&P said.
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