(Reuters) - Moody's Investors Service lowered debt ratings for Bank of America Corp (BAC.N), Citigroup Inc (C.N) and Wells Fargo & Co (WFC.N) on Wednesday, saying the U.S. government is getting less comfortable with bailing out large troubled lenders.
The government is "more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled," said the rating agency, a unit of Moody's Corp (MCO.N).
"This is crystallizing the fact we're in a new political reality," said Jason Ware, equity analyst with Salt Lake City-based Albion Financial Group.
Moody's decision hit Bank of America hardest, as it downgraded the long- and short-term debt of the holding company and long-term deposits at its main banking unit.
The ratings agency downgraded only short-term debt at Citigroup and limited the Wells' cut to its senior debt and to deposits at its lead bank.
Bank of America is struggling with billions of dollars of mortgage losses, litigation and stresses from the need to raise capital to meet new regulatory obligations.
After Moody's downgrade, the cost to insure $10 million (6 million pounds) of Bank of America's debt for 5 years in the credit default swap market rose 48 basis points to $378,000 per year.
But analysts and investors said the downgrade was likely to have little immediate impact on Bank of America's business.
"It certainly doesn't look good, but operationally it shouldn't affect them that much," said Jon Finger, managing partner of Finger Interests Number One Ltd, a Houston-based investment firm that owns Bank of America shares.
The risk of contagion from one failing bank to other banks has "become less acute," Moody's noted, adding the Dodd-Frank financial reform law of 2010 reduced the ties among financial institutions.
When investment bank Lehman Brothers Holdings Inc LEHMQ.PK failed in September 2008, its debt and counterparty obligations created shockwaves throughout the global financial system.
The banks' ratings could be cut further if pending provisions in Dodd-Frank designed to stop too-big-to-fail bailouts are fully implemented, said Sean Jones, senior vice president in Moody's financial institutions group.
Moody's had signalled it might downgrade the three banks' ratings in June.
JPMorgan Chase & Co (JPM.N), which is roughly the same size by assets as Bank of America, but considered healthier, was not part of the review.
Bank of America shares closed 7.5 percent down at $6.38 on the New York Stock Exchange. Citigroup shares were down $1.41, or about 5.2 percent, at $25.52, and Wells Fargo shares slid 96 cents to $23.71.
Despite the cuts for Bank of America, analysts at CreditSights Inc, a research service for institutional investors described the cuts to Wells Fargo ratings as "more cosmetic" and Citigroup's as "a housekeeping item."
Wells Fargo's holding company senior debt was lowered only one notch to "A2" from "A1." Citigroup's short-term rating for the holding company was changed to "Prime-2," which Moody's noted is typical for companies with the same long-term rating as Citigroup.
The holding company's short-term rating had been exceptionally high because those creditors benefited the most from government support during the financial crisis, Moody's said.
Moody's changed only the short-term rating of the Citigroup holding company and left in place its ratings on the holding company's long-term debt, as well its short- and long-term ratings on the main Citibank subsidiary.
Moody's said the long-term outlook on the three banks' ratings remains negative.
Wells Fargo responded with a statement noting Moody's actions on some of its obligations reflected a change in the agency's view of government support, as opposed to a new opinion of the bank itself.
Bank of America said through a spokesman that the downgrade was due to forces beyond its control and asserted it has a healthy liquidity cushion of $400 billion. All of its planned borrowing needs have been prefunded for the rest of 2011, the spokesman said.
Citigroup said in a statement that Moody's downgrade affects less than 1 percent of its funding. The decision will not affect its funding needs, it said.
Moody's announcement is a victory for supporters of the 2010 Dodd-Frank financial oversight law, who have argued that the legislation ends the government's ability to bail out failing banks.
Representative Barney Frank, one of the law's two primary authors, and former Federal Deposit Insurance Corp Chairman Sheila Bair have been most outspoken in arguing the only way a bailout could occur is for Congress to change the law.
"I can't comment on the absolute value of Moody's ratings, but I am pleased that the rating agency recognizes that such large institutions are not 'too big to fail,'" Frank said in a prepared statement.
Reporting by Joe Rauch in Charlotte, North Carolina and David Henry in New York; additional reporting by Jon Stempel in New York and David Clarke in Washington; editing by Andre Grenon and Maureen Bavdek