How Bank Customers Get Hit by the Bank Downgrade

NEW YORK (MainStreet) — The credibility of global banks took a significant hit yesterday as Moody’s downgraded 15 major banks, including heavy-hitters such as Bank of America (Stock Quote: BAC), Barclays and Citigroup (Stock Quote: C).

The downgrades threaten to undermine investor and consumer trust in banks, as the downgrade suggests some doubt at Moody’s on the banks’ ability to pay their debts.

"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," says Moody's Global Banking Managing Director Greg Bauer in a statement released Thursday. "They also engage in other, often market-leading business activities that are central to Moody's assessment of their credit profiles. These activities can provide important 'shock absorbers' that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges."

The Moody’s review, which kicked off Feb. 15, not only covers the “credit implications” of bank operations, but directly takes into consideration exposure to high-risk areas such as investments in residential mortgages and commercial real estate – two hard-hit areas for banks over the past few years.

How will the downgrades affect consumers?

Essentially, the downgrades mean it will grow more expensive for financial institutions to borrow money, as lower credit ratings means investors want higher interest rates from bank investments.

Here’s why: Credit ratings pretty much dictate what banks have to shell out to borrow money from international creditors. By and large, the weaker the credit rating, the higher the interest rates banks must pay to borrow money.