Moody’s downgraded three of the megabanks saying it’s now less likely the government would prop them up. Score one for Dodd-Frank.
WASHINGTON (CNNMoney) — When Moody’s downgraded three banks on Wednesday, it gave a big thumbs up to the Dodd-Frank Wall Street reforms that aim to ensure there won’t be any more big bank bailouts.
Moody’s made clear it believes that the U.S. government is less likely to step in to save a troubled bank, and downgraded Bank of America (Fortune 500), Wells Fargo ( , Fortune 500) and Citigroup ( , Fortune 500).,
“It is more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute,” Moody’s wrote in its downgrade note of Wells Fargo’s stock.
That rationale for the downgrade is music to the ears of leaders who staked their political careers on the Dodd-Frank Act and promised it would end the era of “too big to fail.”
Rep. Barney Frank said on Wednesday that he couldn’t comment on the value of the ratings.
“I am glad that Moody’s recognizes that such large institutions are not ‘too big to fail’,” said Frank, the Democrat from Massachusetts who helped create the Wall Street reforms.
Even Republicans supported the main catalyst behind the Dodd-Frank Act: to stop future taxpayer bailouts of failing Wall Street banks by giving the federal government better tools to unwind giant banks instead of propping them up.
But in the year since Dodd-Frank became law, some economists and banking analysts have questioned how effective Dodd-Frank can be. Since it only governs the U.S. financial system and the biggest banks cross international borders, Dodd-Frank may not be able to prevent a failing big bank from threatening the global financial system, critics say.
Nevertheless, FDIC took a big step toward ending “too big to fail” earlier this month, when it issued rules requiring big banks to create their own so-called living wills. The banks must create road maps showing regulators how to distribute assets in the event of a failure.
And by next July, Bank of America, Citigroup and Wells Fargo will each have to lay out a plan for their break-up should they become insolvent.
Regulators are also working on rules governing how big the capital cushions should be at the biggest banks.
However, there’s still much work to be done before taxpayers can be sure of the end of government guarantees for big banks. Regulators have yet to create the rules that crack down on derivatives or ban banks from using their own accounts to make risky bets.
And Moody’s agreed that there’s still a chance the U.S. government will have to step up if a bank failure threatens the global economy.