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Asian markets fall after bank downgrades

By Madison Park, CNN
updated 8:15 AM EDT, Fri June 22, 2012
STORY HIGHLIGHTS
  • Asian markets fell after Moody's downgraded credit ratings on 15 major banks
  • Downgrades could make it more expensive for the banks to borrow money
  • Moody's made the announcement after the U.S. market close Thursday
  • Downgrades came amid anxieties over Europe's debt crisis

Hong Kong (CNN) -- Asian markets traded lower Friday after ratings agency Moody's downgraded the credit scores of some of the world's largest banks.

In the early hours of trading, Japan's Nikkei was down 0.53%. The Kospi in South Korea tumbled 1.93%. The Hang Seng index in Hong Kong dropped 0.95%. The Shanghai composite was down by 1.40%.

Falls in the Asian markets followed similar trends in the U.S. markets. On Thursday, all three major U.S. indexes fell about 2%; the Dow ended down 251 points (2%), the Nasdaq fell 71 points (2.4%) and the S&P 500 dropped 30 (2.2%).

Moody's released the latest downgrades of 15 financial institutions, including Bank of America and Goldman Sachs, after the U.S. markets closed Thursday. In a statement the agency said, "All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities."

Kui Wai Li, associate professor of economics and finance at the City University of Hong Kong, said the Moody's downgrade reflected continued uncertainty in the global markets.

Moody's bank downgrade: What it means
Markets overreacting to Moody's ratings?
Bank downgrade: Thoughts for investors

"Many of these reasons are related to crisis in 2007, the situation in Europe, funding conditions and some of the banks getting involved too much in the debt market," he said, adding "The message is banks have to do some work now, before it goes out of hand."

The downgrades could raise costs for the banks, making it more expensive for them to borrow money. They may also make it more difficult for the banks to sell their commercial paper to money market funds. Commercial paper is a form of borrowing that banks and other companies use to meet their short-term cash needs. More on CNNMoney.

"What we are saying is some of the safest institutions in the country are actually at some risk of what Moody's calls outside losses if things continue to go down," said CNN's Ali Velshi. "This is risk management. This is saying that if things were to continue to get worse and worse and worse, some of these major banks could take a hit and be at greater risk of not paying back their loans to bondholders."

Moody's sorted the banks into three groups based on the strength of their credit ratings. HSBC was put in the top group with Royal Bank of Canada and JPMorgan. Moody's concluded that while they have significant exposure to capital markets, they have stronger "shock absorbers" than their peers in the form of other, more stable businesses.

"Despite the downgrade, Moody's still views HSBC as one of the strongest banking groups globally," the ratings agency said, citing the bank's geographic diversification and conservative funding profile.

The second group included Barclays, BNP Paribas, Credit Agricole SA (CASA), Credit Suisse, Deutsche Bank, Goldman Sachs, Societe Generale and UBS. And the third group, with the lowest ratings, included Bank of America, Citigroup, Morgan Stanley, and Royal Bank of Scotland. In its statement, Moody's said many of the banks had been "affected by problems in risk management or have a history of high volatility."

"Their shock absorbers are in some cases thinner or less reliable than those of higher-rated peers," it added.

The downgrades came amid continued anxiety over Europe's debt crisis. The losses in U.S. and Asian markets also followed an audit released Thursday that warned Spanish banks may need up to 62 billion euros to restore stability to the country's finances.

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