NEW YORK — When a major bank's credit rating is cut, it deals a psychological blow — to customers, the public and financial markets.
So Thursday's downgrading of 15 of the world's largest banks — including Bank of America, JPMorgan Chase and Goldman Sachs — is almost sure to cause wide concern. Most deposits are perfectly safe, but the downgrades could hurt people in more subtle ways: Banks may jack up fees and might be reluctant to lend, which could affect mortgages, credit cards and even the job market.
The downgrades come at a tenuous time for banks. An avalanche of new regulations adopted after the financial crisis has wiped out many of the fees they charged on credit cards and checking accounts. Banks are also barred from making lucrative bets in the stock and bond markets, eliminating billions of dollars in trading income.
So banks are now squeezing income from any place they can. Basic services that were once free now cost money. Checking accounts can cost $8, a bank statement, $3; canceling a check, $2. The list goes on.
In light of the lower ratings, existing fees might climb further, and new ones could appear.
The top ratings agencies — Moody's, Standard & Poor's and Fitch — hold immense sway over how much every company and state or local government pays to borrow money. They assign ratings on a scale that determines the ability of those entities to pay down their debt.
The downgrades could eventually increase the banks' cost of borrowing in financial markets because investors will demand more interest when they lend the banks money. The downgrades also suck the capital out of banks. That's because all of the large banks sell insurance to investors to protect them from losses on bonds in case of a default.
The downgrades will force banks to set aside billions of dollars in additional reserves because the debt they are insuring has suddenly become riskier. Each notch in the ratings scale triggers automatic requirements for additional money a bank must set aside in reserves.
Because of those requirements, the downgrades will funnel money into reserves and reduce the amount of capital that banks have to lend.
Americans will experience it when they go to their banks for home mortgages, car loans and credit cards.
Small and medium-size businesses will feel the effects even more. They rely heavily on banks for loans to finance their operations because they don't have access to financial markets to raise debt in the same way that large corporations do.