What If?

by Andrew Stuttaford

 There’s a brief summary in the Wall Street Journal today of the possible impact on the banks of either a US downgrade or a default. Here’s an extract: 

The trouble for investors is that it isn’t clear how much banks will shed if the U.S. government can’t resolve the debt crisis.

Part of that depends on whether the result of political failure is a downgrade of U.S. debt, or if the government defaults. The latter could wallop banks, especially if it caused a calamity akin to the run on money-market funds following Lehman Brothers’ collapse.

A ratings downgrade should have more limited impact. But investors will still focus on the too-big-to-fail banks: Bank of America, Citigroup, J.P. Morgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley. This is because, together, these six institutions at the end of the first quarter held $1 trillion in U.S. debt, agency securities and government-backed mortgage bonds. That is equal to about 60% of the $1.6 trillion held by all U.S. commercial banks, according to Federal Reserve data. These firms also held nearly $80 billion in debt issued by states and local governments.


Read the whole thing.