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Moody's ratings cut for giant banks: a new weight on US economy

Moody's downgrade of the US banking system, following turmoil in Europe's banking sector, is a blow to reputation of banks but is not expected to tip the economy into recession.

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Tourists walk past a Bank of America banking center in Times Square in New York June 22. Downgrades by ratings agency Moody's will make funding more expensive for banks that rely the most on capital markets, while reinforcing the competitive advantage of "safe haven" banks that can fund themselves from stable customer deposits.

Brendan McDermid/Reuters

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Moody's Investors Service's decision on Thursday to downgrade the debt of 15 global banks and securities firms is yet another weight on the flagging US economy.

That’s because the cost of doing business for these giant financial institutions such as Citigroup, Bank of America, and J.P. Morgan Chase, will go up as result of having their rating lowered. The banks will then either pass along their higher costs — such as the higher interest rates they will have to pay to borrow money — or will have lower profits which will again inhibit their ability to lend.

“The Moody’s downgrade is not a positive for anyone,” says Sung Won Sohn, a professor of finance at California State University, Channel Islands, and a former banker. “The lower ratings means their ability to lend will diminish.”

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However, some analysts doubt that the Moody’s action by itself will tilt the economy into a recession.

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