Downgrades seen hitting borrowers

NEW YORK — When a major bank’s credit rating is cut, it deals a psychological blow — to customers, the public and financial markets.

So Thursday’s downgrading of 15 of the world’s largest banks is causing some concern. Most deposits are perfectly safe, but the downgrades could hurt people in more subtle ways: Banks may raise fees and might be reluctant to lend, which could affect mortgages, credit cards and even the job market, analysts said.

“It is normal that the first thing that people worry about is whether their money is safe,” said Jim Nadler, chief operating officer at Kroll Bond Rating Agency. “But the real costs may be hidden.”

Bank deposits up to $250,000 are guaranteed by the Federal Deposit Insurance Corporation.

The downgrades happened at a tenuous time for banks. An avalanche of regulations adopted after the financial crisis has wiped out many of the fees they charged on credit cards and checking accounts. Banks also are barred from making lucrative bets in the stock and bond markets, eliminating billions of dollars in trading income.

So banks are now squeezing income from any place they can. There are fees on basic services that were once free. Checking accounts can cost $8, a bank statement $3, canceling a check $2. The list goes on.

In light of the lower ratings, existing fees might climb further and new ones could appear, experts said.

“Banks are going to figure out a way to extract revenue from the customer in any way, shape or form,” said Stanley J.G. Crouch, chief investment officer at money manager Aegis Capital.

The top ratings agencies — Moody’s, Standard & Poor’s and Fitch — hold immense sway over how much every company and state or local government pays to borrow money. They assign ratings on a scale that determines the ability of those entities to pay down their debt.

The downgrades could eventually increase the banks’ cost of borrowing in financial markets because investors will demand more interest when they lend the banks money. With interest rates hovering near record lows, many analysts said the cost of borrowing won’t be affected immediately. However, if the ratings remain at these levels and interest rates rise, banks will pay dearly.

For now, analysts said, it appears investors aren’t worried. The stocks of downgraded banks rose Friday. Bank of America gained 1.5 percent, while JPMorgan Chase and Morgan Stanley each rose 1.3 percent.

The downgrades also suck capital out of banks. That’s because all the large banks sell insurance to investors to protect them from losses on bonds in case of a default.

The downgrades will force banks to set aside billions of dollars in additional reserves because the debt they are insuring has suddenly become riskier. Each notch in the ratings scale triggers automatic requirements for additional money a bank must set aside in reserves.

Because of those requirements, the downgrades will reduce the amount of capital the banks have available to lend. Americans will experience it when they go to their banks for home mortgages, car loans and credit cards, experts said. Those lending markets are already extremely tight.

Since the financial crisis and the bursting of the realestate bubble, banks have become very choosy about lending. During the real-estate boom, banks gave out mortgages without checking if people held jobs and did not always require a down payment.

Today, millions of firsttime home buyers are finding it hard to qualify for home loans unless they have stellar credit, a steady employment history and at least 20 percent of the home loan in cash. Experts said the downgrades will make it difficult for banks to provide much relief to lessqualified home buyers.

The number of credit cards issued by banks also has dropped dramatically because they won’t issue cards to people with poor credit. Credit reporting agency TransUnion estimated that more than 8 million people left the credit-card market between 2009 and 2010.

“Banks are a good source of many low-cost loans, like car loans, and I worry that these avenues will get narrower,” Nadler said.

Small and medium-size businesses, which typically account for a large portion of hiring in this country, are expected to feel the effects even more. They rely heavily on banks for loans to finance their operations, because they don’t have access to financial markets to raise debt in the same way as large, wellknown corporations such as McDonald’s or Coca-Cola.

Since the financial crisis, smaller businesses have been complaining about difficulty getting bank loans. Now there will be even fewer loans to tap and fewer jobs to add, analysts said.

Americans who invest in bond funds also are likely to feel the effects of the downgrades in their quarterly statements. Many pension funds and large mutual funds have rules that don’t allow them to invest in bonds that are rated below a certain level. They will be forced to sell those bonds even if it means a loss.

Ultimately, this takes away all the advantages that banks have over other financial companies, said Andrew Ang, a finance professor at Columbia Business School.

“Banks have less capital to get the best innovations,” Ang said. “So if you have a large amount of money, why even go to a bank?”