New cracks in banking

New cracks in banking

Credit rating agencies have by now developed an embarrassing reputation of closing the stable door after the horse has bolted. They have too often downgraded debt after the problems within companies and banks have come out in the open.

Yet, the Friday decision by Standard and Poor’s to downgrade the debt of 11 of the world’s largest banks is significant. At one stroke, the rating agency has signalled that there is still plenty to worry about the state of the American and European banking sectors.

The subtext is worrisome: large government bailouts and promises of further support are the main reason why the likes of Citigroup, Goldman Sachs and Deutsche Bank have not been defined as issuers of junk bonds.

The note that goes with the multiple downgrades says that there are specific reasons for each downgrade, rather than just the common problem of the economic slowdown. These include everything from poor risk management to integration risk after mega mergers. Clearly, the worst is not over for Western banks.