Moody's just took a hatchet to the credit ratings of the biggest global banks.
The rating agency on Thursday cut its rating for banks in the U.S., U.K. and Europe -- 15 in all, including all of the "too big to fail" banks in the U.S.
Wall Street had months to prepare for the cuts, so they should have little additional effect on banks' stock prices or banks' ability to borrow money. But borrowing costs are already relatively high, and the downgrades will not help an industry still struggling with a weak global economy and the aftershocks of a financial crisis it helped create.
The cuts could also lead several banks to post billions of dollars in additional collateral and curb their ability to trade derivatives.
In a press release announcing the downgrades, Moody's said, "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. In the past, these risks have led many institutions to fail or to require outside support, including several firms affected by today’s rating actions."
Bank of America's debt rating was cut by one notch. Citigroup, Goldman Sachs and JPMorgan Chase each took a two-notch downgrade.
Morgan Stanley's rating, meanwhile, was also cut by two notches, to Baa1 from A2 -- a break for the bank. Moody's had warned in February that it could cut Morgan Stanley by up to three notches. Since then, the bank has vigorously contested the impending downgrade, pointing to capital it has raised and risks it has shed in the years since the financial crisis.
After the downgrade, Morgan Stanley issued a press release criticizing it:
"While Moody’s revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years," the bank said.
Morgan Stanley shares jumped nearly 4 percent in after-hours trade. The stock had fallen nearly 27 percent since the Moody's warning in February.
Also getting the downgrade knife were Credit Suisse, Barclays, HSBC and several other British and European banks.
Moody's warned of the possible downgrades in February, so investors were well prepared for the news. In the credit markets, bank borrowing costs already reflected major downgrades, with some bank bonds trading like "junk," or below investment-grade.
Still, the downgrades will have some effect. Several banks have warned that they will have to post billions in additional collateral as a result of the downgrades, making it more costly for them to buy and sell derivatives and other investments. For example, JPMorgan's two-notch downgrade could force it to post $4.7 billion in collateral and other payments, according to a CNBC report. Bank of America's one-notch downgrade could force it to post $2.7 billion, the report says.
"Lower ratings will likely reduce the degree of trading activities over time at a particular institution," CLSA bank analyst Mike Mayo wrote in a research report.
Bank stocks fell broadly on Thursday, with the KBW Bank Index down more than 2 percent, though there were plenty of reasons to sell besides the well-telegraphed bank downgrades. The Dow Jones Industrial Average tumbled about 250 points, in one of the worst selloffs of the year.
A series of dismal economic reports from China, Europe and the U.S., including uncomfortably high new claims for unemployment benefits, weighed on markets before the U.S. trading day even began. Then Goldman Sachs downgraded its forecast for the S&P 500 stock index, which seemed to fuel an even bigger selloff. And news out of Europe continued to disappoint, with a report saying Spanish banks might need $78 billion in capital to survive, and Greece presenting a wish list for tense renegotiations with the rest of Europe for its bailout terms. The bitter cherry on top of this gloomy sundae was that the Fed on Wednesday declined to do much heavy lifting to help the economy or stock market.
"This is just one of many worries right now," James Bianco, head of the research firm Bianco Research in Chicago, told CNBC about the bank downgrades.
Nonetheless, the threat of the downgrades did not help, looming over the market all day after an early Sky News report Thursday that the downgrades were coming.
The banks have been through the downgrade rigamarole before. In November, Standard & Poor's whacked much of the financial sector with the downgrade stick, without causing the world to end.
This article has been updated to include information from a Morgan Stanley press release and details about additional collateral that banks might have to post as a result of the downgrades.