Moody's Fear FDIC Protection can Harm Card Ratings

One of the best financial analysis groups in the U.S., Moody's Investors Services, expressed concern that cardholders under banks receiving federal aid can suffer declines in their credit card ratings. According to a report published by the analysis group, the Federal Deposit Insurance Corporation (FDIC) and its uncertainty over the fate of several banks under the receivership of federal aid grants can lead to lower ratings for millions of credit cards across the U.S.

At present, the FDIC is still unsure whether to grant "safe harbor" status to certain banks undergoing restructuring and securitization. Financial experts argue that the nearing implementation of new accounting rules in November can have a negative impact on credit cards under the sponsorship of the beneficiary banks. Experts believe that if no concrete action is taken in the next few weeks, the nation's credit agencies may have no choice but to downgrade the ratings of the banks in question. This can ultimately lead to a decline in the credit card ratings of millions of cards in the credit card market.

As early as September, representatives from the different banks have called on the FDIC to finalize plans before the implementation of the new rules. The American Securitization Forum proposed last month that the FDIC should hasten its decision to address the growing concern over the fate of the banks receiving federal grants.

Analysts from Moody's say that the banks can receive a wide variety of protection. William Black, a senior vice president at the financial analysis company, explains that the concerned banks can either receive full protection, down to no protection at all. In the worst case scenario, the ratings of banks who fail to secure further protection from the federal government can suffer downgrades. When this happens, experts say, the card ratings of the banks' clients can decline substantially.

According to experts familiar with the credit industry, the subsequent downgrading would rely greatly on the credit strength of the banks in question. Stronger banks would likely be spared from sudden ratings declines, which in turn would reflect to the credit cards currently in circulation.

Analysts say that they will continue to monitor how the banking industry fares to assess whether the card ratings of millions of active credit cards may suffer in the near future. Even with the increasing concerns, Moody's believes that the rating transition will not be that significant and will be on limited scale.