• it would affect a bank’s ability to engage in Repos with credit-sensitive counterparties, though Schorr thinks it's relatively insignificant because firms have been “scaling back less-liquid Repo with money market funds.” 
• it would require them to make contractual collateral or termination payments, but again, these “are very manageable.”
• it could reflect changes in the assumed levels of government support that the rating agencies have assigned the banks.

Perhaps of more significance, is the pace of recovery, which is likely to be a bit slower than the agencies were expecting.  And, among other things, banks face new challenges like European sovereign risk and the negative impact of regulatory reforms on revenue. 

A BofA spokesman responded  by noting that the bank has made "significant strides to strengthen our balance sheet, improve earnings, capital and liquidity and reduce our risk profile.”  He further notes that, since Q1 of 2009, the bank has raised more than $57 billion of Tier 1 common equity and reduced risk-weighted assets by $290 billion.  This would appear to be the case, because “balance sheets are in better shape and fundamentals are improving, ..."  according to Schorr.

In the end, the rating agencies assume a certain level of government backing of banks, meaning they don’t think the system or the government is going to let banks fail if they got into trouble.  Some firms like Bank of America have four notches of government support in their Moody’s rating, he writes.  Meanwhile, other banks, like JPMorgan Chase, have no assumed government support in its S&P rating, he says. 

The bottom line:  Downgrades would ultimately drive up financing costs and make it more difficult for the affected banks to compete in businesses like prime brokerage.  But “we don’t think it will cause a meaningful loss of funding capacity.”  Thank you, Mr. Schorr.  [NYT Dealbook, 12/6]