Moody's: TARP repayments don't change bank ratings

The repayment of about $68 billion in bailout money by 10 large banks may seem like signs of financial strength, but Moody's Investors Services said late Wednesday it's not in the interest of creditors in the short term.

The ratings agency said "the repayments have the immediate effect of lowering capital levels and of shrinking liquidity positions at a time when economic and financial market conditions remain highly unsettled."

Moody's does not expect to lower the ratings of the 10 banks _ among the largest in the country_ who made repayments Wednesday. But downgrades may be down the road. If any of the 10, or other banks that repay funds received through the bailout program known as the Troubled Asset Relief Program, or TARP, fail to keep enough cash in reserve to absorb potential losses, Moody's said it may cut their ratings.

"TARP repayment should in no way be interpreted as a return to a normal operating environment _ significant challenges remain that require vigilance," said Moody's Vice President Jean-Francois Tremblay in a report. He said the ability to repay follows a period during which banks were able to raise equity capital and issue long-term debt without government backing. "Nevertheless, the negative outlook on the sector reflects our view that banks' capital and earnings will continue to be under pressure for the remainder of the year, and into 2010."

As the government moves to exit from its "extraordinary support to the financial sector," Tremblay said banks will have to be able to refinance maturing debt or obtain funding on their own. If the capital markets again become erratic, investors are likely to be more discerning about funding banks no longer receiving government support, he said.

American Express Co., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, Bank of New York Mellon Corp., U.S. Bancorp, Northern Trust Corp., State Street Corp., BB&T Corp. and Capital One Financial Corp. each made TARP repayments Tuesday.

Treasury has recovered more than $70 billion distributed under the $700 billion program, including about $2 billion from earlier repayments by smaller banks.