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Great. This was all they needed. Hot on the heels of news that Europe's investment banks have been losing local market share to U.S. competitors, they now have to digest a debt downgrade from Standard & Poor's. Long term ratings on Barclays, Deutsche Bank and Credit Suisse have been cut from A plus to A. UBS was already at A and will stay there. The agency cites a range of woes as the rationale: regulation will lead to declining revenues; market conditions are uncertain; business models will need restructuring, et cetera. Share prices fell in response. Barclays was down 3 per cent, while Credit Suisse and Deutsche Bank fell 4 per cent before recovering slightly.
So far, so grim. But Portuguese fears pushed share prices in all of the big European banks down on Wednesday, and the three that were downgraded by S&P fell by no more (and in some cases by less) than the others. As it is, the downgrade brings the long term ratings in line with those given to U.S. investment banks such as Goldman Sachs, Morgan Stanley and JPMorgan.
And while it is never good news to have debt ratings cut, the reasons are well trailed. Ringfencing, the impact of the end of quantitative easing, higher capital requirements, the financial transaction tax and the impact of new U.S. rules for large overseas banks have been widely discussed. Of these, the U.S. rules are potentially the most concerning. Goldman Sachs has estimated that the proposed regulation would require Deutsche Bank to transfer $13-billion (U.S.) of capital to its U.S. subsidiary.
Markets have already reacted to these issues. Credit default swaps – the cost of insuring against a default – for all three banks have risen over the past six months. There are lots of reasons to be worried about Europe's banks, especially those that have a big exposure to investment banking. But a downgrade from S&P is not, in itself, one of them.