Moody’s placed Bank of America’s covered bonds on review for downgrade yesterday (Thursday) after initiating negative reviews of the issuer and 16 other financial institutions with global capital markets operations on Wednesday.

The rating agency said that the possible downgrade of Bank of America NA’s A2 rating was the driver behind its review of the BA Covered Bond Program’s Aa3 rating.

If the rating agency downgrades Bank of America by one notch to A3, a downgrade of the covered bonds to A1 is likely, said Moody’s, while if the rating of the issuer is confirmed, the covered bond rating would be likely confirmed.

The review action reflects Moody’s view that the rating of a covered bond with a high degree of exposure to market risk value is closely linked to the rating of its sponsor, absent a significant amount of committed overcollateralisation. The rating agency said it considered the BA programme to be particularly subject to market value risk. It said that in the unlikely event that the sponsor bank defaults, the entire cover pool may need to be liquidated in a short period of time.

The amount of overcollateralisation in the programme that the rating agency views as committed is approximately 4%, which is the minimum amount of overcollateralisation required under the programme documents, Moody’s noted.

In its rating actions on the 17 financial institutions with global capital markets operations, the rating agency placed six on review for downgrade, and extended reviews that had been announced prior to Wednesday for 11 whose review for downgrade had been initiated with an announcement it also made on European banks. Moody’s noted that nine of the 17 banks included in the review are headquartered in Europe and are also affected by other adverse drivers.

Capital markets firms are confronting evolving challenges, according to the rating agency, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens, and more difficult operating conditions. Moody’s said some of these risks have been partly mitigated by changes to business models, and higher regulatory capital and liquidity requirements, but they have not been eliminated. It said these adverse trends had placed acute pressure on these banks’ profitability and increased the scope of restructuring required in their core business to generate the level of return on equities expected by shareholders.