How Could Bank downgrades affect you?

Friday, July 6th, 2012
Updated: July 6th, 2012
The content is accurate at the time of publication and is subject to change.

A major bank’s credit rating cut is like a snowball – draws in the customers, public and financial markets.

Downgrading of the world’s largest banks is almost sure to cause wide concern. People worry about the safety of their money, which is good, but the real costs may be hidden. Most deposits are perfectly safe, but the downgrades could hurt in other ways: banks may increase fees and might be unwilling to lend, which could affect mortgages, credit cards and even the job market.

The downgrades come at a delicate time for banks. An avalanche of new regulations adopted after the financial crisis has swept away many of the fees they charged on credit cards and checking accounts. Banks are also forbidden to make profitable bets in the stock and bond markets.

So banks are going to extract revenue from the consumers in any way, shape or form. They are now trying to squeeze income from any place they can. Once free basic services, such as account check, a bank statement, canceling a check, now cost money. The list of services continues and existing fees might climb up further and new ones could appear.

The downgrades could ultimately increase the banks’ cost of borrowing in financial markets because the investors will demand more interest lending the banks money. Though, it can appear that the cost of borrowing won’t be affected immediately.

The downgrades suck capital out of banks by making the large banks sell insurance to investors to protect them from losses on bonds in case of a default. The downgrades will also force the banks to set aside billions of dollars in additional reserves because the debt they are insuring has suddenly become riskier. This will result in adding money to reserves and reduce the amount of capital that banks have to lend.

Even now this capital is extremely tight. The number of credit cards issued by banks has dropped because they won’t issue cards to people with poor credit. According credit reporting agency TransUnion estimation, more than 8 million people left the credit card market between 2009 and 2010.

Eventually, this will swipe away all the advantages that banks have over other financial companies as banks have less capital to get the best innovations.

All rates and fees, and other terms and conditions of the products mentioned in this article/post are actual as of the last update date but are subject to change. See the current products' Terms & Conditions on the issuing banks' websites.

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