Moody's also cut the standalone baseline credit assessments of Bank of New York Mellon and State Street one notch to A1. The agency said the move reflected "the long-term profitability challenges" facing the two custodian banks.
The rating agency confirmed the senior holding company ratings of Bank of America, Citigroup, State Street and Wells Fargo. It upgraded the ratings of BofA and Citi subsidiaries, as well as their junior subordinated debt and preferred shares.
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In after-hours trading the share prices of the banks initially fell on the news before recovering. Shares in Morgan Stanley were 0.7 per cent lower, Goldman Sachs was down 0.2 per cent, while JPMorgan had eased 0.1 per cent.
Morgan Stanley has been seen as the most vulnerable to credit rating downgrades. Thursday's downgrade takes the bank to two notches above "junk" status.
In its last quarterly filing, Morgan Stanley said it might have to post an additional $3bn in collateral to derivatives counterparties if it was downgraded to Baa2 by Moody's and to BBB by Standard & Poor's.
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However, Morgan Stanley still has a higher rating by S&P so it will not have to post the full $3 billion. However, some of its contracts are based on the lower credit rating, giving those counterparties the option of demanding more cash or other high-quality collateral to back its trades.
"Over time they [credit ratings] tend to migrate within a notch of each other," says Glenn Schorr, bank analyst at ISI. "The market will price the debt of these companies – the ratings are an important input but they're only one input."