As reported by CNBC, ratings agency Fitch is considering downgrading dozens of US banks, including JP Morgan (JPM.US). As a reminder, Fitch Ratings downgraded the health of the banking sector in June, but this went largely unnoticed as it did not result in an actual downgrade of the banks' ratings. On the other hand, however, if the agency decides to downgrade the banking sector to A+ from the current AA- it will be forced to reassess the nearly 70 banks for which Fitch is responsible for analytical coverage.
Last week, Moody's made a similar move, which triggered heightened volatility in financial markets.
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Source: Moody'via Bloomberg
The problem with another downgrade to A+ could be that the industry's rating would then be lower than some of the highest rated lenders. The country's two largest banks by assets, JPMorgan (JPM.US) and Bank of America (BAC.US) would likely be downgraded to A+ from AA- in this scenario, as banks cannot be rated higher than the environment in which they operate.
If leading institutions such as JPMorgan are downgraded, then Fitch would be forced to at least consider downgrading all of its peers. This could potentially push some banks closer to 'non-investment grade' status.
A selection of US banks that have already seen volatility during pre-opening trading are now seeing declines. Banks in the KBW index. Source: Bloomberg Finance L.P.
