Moody's Investors Service slashed the credit ratings of more than a dozen giant global banks amid worries that Europe's economic turmoil could slow both profit and growth.
The move came as the 15 banks singled out by Moody's try to navigate through the European debt crisis, which could have a major effect on their trading businesses. Eurozone leaders are trying to keep economic problems in Greece from spreading throughout the continent and beyond.
"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," Moody's global banking managing director, Greg Bauer, said in a statement.
The slap in the face could make it more expensive for the banks to attract funds and engage in riskier businesses, although analysts said the downgrades were widely expected and had already been priced into the companies' stocks.
The only U.S. mega bank unaffected was Wells Fargo & Co., which doesn't have a huge international trading arm like the others.
Anticipation of the coming downgrades contributed to a global decline in stock prices Thursday, along with reports showing slowing in manufacturing and a bearish outlook for U.S. stocks from Goldman Sachs.
An index of U.S. bank stocks fell 2.3%, with the broad Standard & Poor's 500 index down 2.2%. Morgan Stanley shares fell 1.7%, JPMorgan Chase by 2.6%, Goldman Sachs by 2.7% and Bank of America by 3.9%.
Moody's had warned in February that it was considering cutting the credit ratings of 17 banks, including the five U.S. institutions, as a result of the economic crisis in Europe and the threat of default on sovereign debt in countries there.
Also listed were such familiar foreign banks as Switzerland's UBS and Credit Suisse Group, Britain's Barclays and HSBC Holdings, France's BNP Paribas and Credit Agricole, and Germany's Deutsche Bank.
The credit rating firm already had downgraded the ratings for two of the 17, Australia's Macquarie Group and Japan's Nomura Holdings, finishing the job with the downgrades of the other 15 on Thursday.
All of the affected banks risk "outsized losses" inherent in the capital markets business, exacerbated by the European crisis, Bauer said.
"In the past, these risks have led many institutions to fail or to require outside support," Moody's said in a statement announcing its actions.
Credit downgrades can raise borrowing costs and result in banks' having to maintain more collateral to buffer losses in risky businesses such as the trading of volatile derivative securities.
Among the U.S. banks, Morgan Stanley had faced the greatest threat; Moody's said it was considering a three-notch downgrade.
It put Morgan Stanley among a group of banks including Bank of America that it said "have been affected by problems in risk management or have a history of high volatility, while their shock absorbers are in some cases thinner or less reliable than those of higher-rated peers."
The downgrades turned out to be only two notches, putting Morgan Stanley in a group that also included Citi, JPMorgan and Goldman. BofA, which already had the lowest credit ratings among U.S. banks, had its ratings cut by one notch.
In a statement, Bank of America said the company had "significant liquidity and resources" as part of a plan to rein in risk and build up reserves.
Morgan Stanley said its ratings "still do not fully reflect the key strategic actions we have taken in recent years," adding, "With our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders."
The other banks did not immediately respond to requests for comment.
In a report Wednesday anticipating the downgrades, Credit Agricole Securities bank analyst Mike Mayo said they appeared "inevitable" given the "weaker geopolitical outlook."
"The market seems to have already priced in downgrades for the shakier banks/brokers, especially Bank of America (lowest rated among the big U.S. banks) and Morgan Stanley," Mayo wrote.