[ by Howard Haykin ] The big Big Bank downgrade was expected.  Moody's Investors Service had warned banks in February that a downgrade was possible, and over the past month, the topic of downgrades was a popular topic in business media - coupled most often with the names, Morgan Stanley, Bank of America, and Citigroup. And so it happened - on the First Day of Summer 2012, Thursday, June 21. The credit ratings of 15 major banks were downgraded to reflect new risks that the industry has encountered since the financial crisis.  The lower credit ratings are expected to increase the cost of borrowing by the banks - and cause further damage to their bottom lines, that had already been grappling or reeling from weak profits and global economic turmoil.  The effect on the banks is likely to be felt elsewhere, further unsettling the choppy, inconsistent equity markets. According to Robert Young, a managing director at Moody's Investors Service: "The risks of this industry became apparent in the financial crisis," and "these new ratings capture those risks." Impacted Banks. Citigroup and Bank of America, which have struggled to fully recover from the financial crisis, were among the hardest hit. After the downgrades, the banks stand barely above the minimum for an investment grade rating, a sign of the difficult business conditions they face. Aside from Citi and BofA, these 13 other banks were downgraded:  (1) Morgan Stanley .. (2) JPMorgan Chase .. (3) Goldman Sachs .. (4) Credit Suisse .. (5) Deutsche Bank .. (6) UBS .. (7) HSBC .. (8) Barclays .. (9) BNP Paribas .. (10) Crédit Agricole .. (11) Société Générale .. (12) Royal Bank of Canada .. and (13) Royal Bank of Scotland. The downgrades are part of a broad effort by Moody's to make its analysis more rigorous. During the financial crisis, Moody's and its rival rating agencies were "raked over the coals" for having placed high ratings on mortgage bonds that later imploded.  Moody's approach reflects its belief that large banks have weaknesses that could still hurt their creditors. The threat of a downgrade has rippled through the markets for months.   After Moody's held out the prospect in February of a 3-notch downgrade for Morgan Stanley, the bank's shares dropped more than 25%.  Moody's ended up cutting the firm's rating by "just" 2 levels.  Now, bank executives will try to convince their creditors and large customers that Moody's has overreacted. Wall Street Views Moody's Changes as Short Sighted. Some analysts feel that Moody's is playing a game of catch-up.  The latest actions, say critics, are backward-looking and do not consider the measures that banks have taken to strengthen themselves, including raising capital and getting out of certain risky businesses like proprietary trading.  RBC Capital Markets analyst Gerard Cassidy said, "I feel that Moody's action is five years too late." Executives Citigroup and Bank of America argued on Thursday that the new ratings failed to reflect the safeguards and changes that they had put in place in recent years.  Citi issued a statement saying that Moody's approach "fails to recognize Citi's transformation over the past several years," and adding that "Citi strongly disagrees with Moody's analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted." Bank of America echoed such sentiments: "In addition to strengthening our governance and risk management, Bank of America ended the first quarter of 2012 with record capital ratios."  Those capital positions, which are banks' main buffer against losses, could be a point of strength across the industry. The lack of capital in the crisis left the financial system vulnerable, prompting the government to bail out many of the largest banks. Since then, they have increased their cushions.  Today, Morgan Stanley's capital is twice what it was in 2007. "The banking system is safer today than any time in the last 30 years," said Mr. Cassidy. "We have not seen capital levels like this since the 1930s." Moody's Concern Remains. As convincing as the above arguments appear, Moody's remains concerned.  In its report Thursday, the credit rating agency said it saw several weaknesses in the banks' Wall Street operations, including their complexity and opacity. Moody's highlighted a history of volatile profits and problems with risk management.  It also mentioned the recent trading debacle at JPMorgan Chase - where losses could reach $5 billion. The agency further noted the industry's continued dependence on short-term loans to finance their Wall Street operations.  This type of credit dried up quickly in the crisis, forcing them to borrow from the government. Finding a Silver Lining in the Cloud. Some banking experts welcomed the downgrades, saying the credit rating agencies were finally beginning to reflect the risks within large banks. "These downgrades are good news," said Anat R. Admati, a professor of finance and economics at Stanford University. "Right now, their balance sheets are very fragile." For further details, go to:   [Dealbook, 6/22/12].