BANK´S SAFETY NET FRAYING / THE WALL STREET JOURNAL ( HIGHLY RECOMMENDED READING )

HEARD ON THE STREET

NOVEMBER 15, 2009, 5:44 P.M. ET.

Banks' Safety Net Fraying

The U.S. banking sector has enjoyed immense government support for more than a year. But a little-noticed ratings action by Standard & Poor's has put a small, but potentially important, dent in the wall of moral hazard that protects the banks.

Bank ratings clearly illustrate the high level of government backing for the industry. For instance, S&P gives Citigroup a single-A rating, but adds that it would be rated triple-B-minus, four notches lower, with no assistance. Morgan Stanley and Bank of America get a three-notch lift. Even Goldman Sachs Group enjoys a two-notch benefit.

However, S&P recently downgraded a Citibank subsidiary, Citibank Korea Inc., to its stand-alone rating, even though it theoretically still enjoys the backing of its parent. S&P did so because it feels there is "uncertainty" about whether the U.S. government wants Citi providing additional support to "noncore" overseas affiliates.

This is interesting, first, because Citi hasn't talked about the unit as noncore. More important, it shows S&P is starting to tweak how it thinks about government backing. At some point, all banks will have to return to stand-alone ratings. S&P declined to detail a road map for that process. Citi may fare fine, since it's better capitalized than precrisis.

But the longer the enhanced ratings remain, the longer it will take for investors to know the true strength of the banking sector.

—Peter Eavis

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved