Moody’s has decided that the federal government will most likely not bail out the U.S. banks if they get into financial trouble again. Because of this, the ratings on several big financial institutions in the U.S. have been dropped a notch.

Notable names on the list of banks to take a hit are Morgan Stanley, Goldman Sachs, and JPMorgan Chase. Each of these banks had their ratings on long-term senior unsecured debt cut down a level. Goldman Sachs now holds a Baa1 rating, while Morgan Stanley is reduced to Baa2, and JPMorgan now rests at A3. According to reports, each of the three banks also took a hit on their subordinated debt rating from Moody’s.

S&P Ratings Cut Earlier This Year

While Moody’s is the second largest rating agency, the Standard & Poor’s rating drop is an equally big hit. The S&P released a similar statement back in June, noting that the government is trying not to relive the big bailout situations of the credit crisis.

The Dodd-Frank Act contains reforms that safeguard the use of taxpayer money from being used to bail a bank out of trouble. This reform calls instead for the formation of a resolution authority to help bring the bank to as gentle an end as possible, allowing creditors to incur the losses, rather than the taxpayers.

Moody’s Opinion

Robert Young, of Moody’s, said, “We believe that U.S. bank regulators have made substantive progress in establishing a credible framework to resolve a large, failing bank. Rather than relying on public funds to bailout one of these institutions, we expect that bank holding company creditors will be bailed-in and thereby shoulder much of the burden to help recapitalize a failing bank.”

Banks Are Unhappy

This downgrade follows a similar one issued by Moody’s last year, which left banks arguing that the widespread downgrades were not fair. The banks claimed that Moody’s was overcompensating for optimism prior to the financial crisis.

Going forward, Moody’s and S&P will definitely be watching closely to see how the banks react with the changing economy. The bank crisis still remains a vivid memory for many people, and the ratings firms hope to avoid another similar situation in the future.

Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.