June 23, 2012 in Business

Bank downgrades could hurt loans, credit cards

Pallavi Gogoi Associated Press
 

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 almost sure to cause widespread concern. Most deposits are perfectly safe, but the downgrades could hurt people in more subtle ways: Banks may raise fees and be reluctant to lend, which could affect mortgages, credit cards and the job market.

“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 Ratings Agency. “But the real costs may be hidden.”

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

But the downgrades come at a tenuous time for banks. An avalanche of new regulations adopted after the financial crisis has wiped out many of the fees they charged on credit cards and checking accounts. Banks are also 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 anyplace they can. Basic services that were once free now cost money. 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 and new ones could appear.

“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, of 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, most analysts say 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.

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