Government commitment to Dodd-Frank contributed to ratings downgrade

Moody’s Investors Service cited a strong federal commitment to Dodd-Frank regulations and market uncertainty in its latest decision to downgrade some of America’s largest banks.

“Put simply, we believe government support for creditors of bank holding companies is becoming less certain and predictable,” Moody’s said in its recent report, according to CNBC News.

Moody’s added that “support for creditors of operating entities remains sufficiently likely and predictable to warrant stable outlooks,” suggesting that the government would still bailout operating creditors.

While Moody’s supports the resolution authority granted by Dodd-Frank, there is skepticism about the viability of the plan.

“We’re still not sure if the resolution plan is workable, and there are competing priorities, which are at times irreconcilable,” Bob Young, Moody’s managing director of North America banking, said, CNBC News reports.

While regulators have attempted to minimize systemic risk, they have also sought to ensure that taxpayers are not responsible for bank bailouts. The resolution authority granted U.S. regulators the ability to unravel major bank failures in a process similar to bankruptcy. There has been much debate, however, regarding the plan and its potential hazards and inadequacies.

Moody’s report has other implications, as the downgrading will make it more expensive for banks to raise capital, thereby reducing their overall size. Additionally, banks will be subject to increased capital requirements under Basel III, which require banks to essentially pay to be big.

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