(Reuters) - Moody's Investors Service said it may downgrade the debt ratings of Bank of America Corp (BAC.N), Citigroup Inc (C.N) and Wells Fargo & Co (WFC.N), citing concerns about waning U.S. political willingness to offer support for the largest banks.
The sweeping Dodd-Frank financial reform law is eliminating the certainty of U.S. governmental support that some "too big to fail" banks needed to survive the financial crisis, Moody's said on Thursday.
Lower ratings can translate into higher borrowing costs, which can have a big impact on a bank's bottom line. They can also force banks to post more collateral in derivative trades.
But the ratings agency acknowledged an overall improvement in the operations of Bank of America and Citigroup since the crisis. That recovery could compensate for the changing political environment and lessen the severity of any downgrade, Moody's said on Thursday.
The banks' shares fell initially after Moody's made its announcement, but turned positive by midday.
"If you factor in the credit improvement, basically it could be a wash. ... The headline was scary but if you read further, it's not that bad," said Alan Villalon, a senior bank analyst at Chicago-based Nuveen Investments, which owns bank shares.
Debt markets reacted more negatively, with costs for credit-default swaps on the banks rising. Bank of America CDS were most affected, with the price to protect $10 million (6 million pounds) of bonds over five years rising to $157,000 a year from $147,000 the day before, according to Markit.
But some of the banks' debt holders were unconcerned.
"It's old news and reactive to events that are very obvious ... it doesn't dissuade us from owning the debt of those banks," said Marshall Front, chairman of money manager Front Barnett Associates, which owns bonds of banks including Citigroup, Bank of America and Wells Fargo.
LOSING GOVERNMENT 'UPLIFT'
Moody's said on Thursday it placed the deposit, senior debt and senior subordinated debt ratings of the three banks under review for possible downgrades.
The banks' ratings are currently buoyed by "uplift" from government support of the banking system during the financial crisis, Moody's said.
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