Moody’s Investors Service on June 21, 2012 downgraded more than a dozen major banks as they grapple with declining profitability and a weakening global economic environment.
Q: Will the downgrades affect the banks’ businesses in Latin America and their customers in the region? Will the downgrades create opportunities for smaller financial institutions in Latin America? How well are banks in Latin America faring, comparatively, amid the current global economic turmoil?
A: By reducing the credit ratings of 15 major banks and securities firms with global capital operations, Moody’s seeks to provide shock absorbers to mitigate the continued volatility of global capital markets operations. Many institution leaders, however, have designated Moody’s June 21 downgrades, and the parallel downgrade of Spanish institutions on June 25, a ‘backward-looking’ and without proper account for what many of these institutions have done to cut risk in the last two years. While Moody’s downgrades did not result in any immediate, substantial market impact, they may have longer term effects on operations, forcing these global firms to post more collateral to trading partners in derivatives deals. Critically, the impact on Latin America will be felt through the subsidiaries of downgraded U.S. and Spanish institutions. For example, Banco Santander, which was downgraded two notches from ‘A3’ to ‘Baa2,’ maintains considerable operations throughout Latin America, including Brazil, the region’s largest economy. Noting the vulnerability of emerging markets to the Eurozone crisis, Moody’s downgraded Banco Santander’s Latin American operations. Further, on June 27, Moody’s downgraded the standalone bank financial strength ratings or the standalone baseline credit assessments of eight additional Brazilian banks and also downgraded the country’s stock exchange operator as part of its global review of the financial sector. In theory, once Moody’s hand takes grasp of the remainder of Latin America’s banking institutions, we will see increased borrowing costs and reduced activity in those regions where the banks invest the most capital. This will likely create a niche industry for smaller, more localized financial institutions in Latin America which are not fully tied to the Eurozone debacle or U.S. regulatory actions. In reality, however, the Moody’s downgrades were widely expected, giving the banks and their counterparts around the world time to prepare—and be ready for the next crisis that may hit the global economy.
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