Earlier this week, it was revealed that the U.S. government's credit rating was downgraded based on concerns about its fiscal deterioration, its high and growing general government debt burden, and the erosion of governance.
Fitch, which is one of three major independent agencies that assess creditworthiness, downgraded the U.S. to AA+ from AAA on Tuesday.
Following the news, Wells Fargo analysts highlighted five areas to watch for banks:
Teasury yields/securities prices: The analysts explained that they have previously reflected on the impact of higher rates on bank balance sheets. However, the analysts said, "The question is the degree that credit plays a role on bank loan/securities prices," noting that some investors may be forced sellers.
GDP: They stated that "the business of banking is intertwined with the health of the government," and with the Federal government a large part of the U.S. economy, banks could be negatively impacted if a shutdown or debt ceiling crisis hurts government spending, economic growth, and overall credit quality.
Banks being used to help raise government revenue: The analysts said banks have previously been targeted as a way to increase government revenue, even for activities that aren't related to banking and finance. As a result, they believe similar moves, such as taxes on capital market transactions, could be considered in some scenarios.
More government shutdowns: With Fitch noting the risk of future debt ceiling crises and possible government shutdowns, the analysts believe it is something to watch, especially as press reports indicate "another shutdown seems to be on the table as soon as this October."
"A gov't shutdown could negatively impact commerce (outside of entitlements and debt service of outstanding USTs) and the economy in the near term. However, prior shutdowns had comparatively little impact on overall credit quality," they wrote.
Regulation and pricing: The analysts said one question is if the downgrade encourages regulators to treat U.S. debt differently for risk weighting, with another being whether it pushes U.S. debt yields higher to account for higher risk. "If so, this could impact loan and capital markets pricing," they stated.