Bank of America’s covered bonds have been cut from Aa2 to Aa3 by Moody’s, with the downgrade driven by a lowering of the sponsor bank’s rating from Aa3 to A2 last Wednesday that reflected the rating agency’s expectation of less government support for large US banks.

Moody’s cut the BA Covered Bond Issuer programme on Friday. The covered bonds had been on review for downgrade since 8 June.

“The downgrade of Bank of America, NA led to a downgrade of the covered bonds because the strength of the covered bonds is highly dependent on the strength of the sponsor,” said the rating agency. “The strength of the sponsor is a key driver of the covered bond rating because the sponsor is the primary obligor of the covered bonds.”

Moody’s noted that a two notch uplift from the sponsor bank’s rating to the covered bonds’ rating is because investors have recourse to a cover pool of segregated assets. The BA Covered Bond Issuer programme requires Bank of America to maintain a minimum overcollateralisation level of 4%.

The downgrade of Bank of America, NA – and of Bank of America Corporation from A2 to Baa1 – last Wednesday reflected a lessening in the amount of support Moody’s incorporates into the ratings.

“The downgrades result from a decrease in the probability that the US government would support the bank, if needed,” said the rating agency. “Moody’s believes that the government is likely to continue to provide some level of support to systemically important financial institutions. However, it is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute.”