News on Tuesday that the U.S. government will prop up financial institutions with up to $250 billion in equity injections will work to address key risks in the U.S. banking sector, but won't solve all of the challenges facing banks.

"The actions taken by the Government are very positive steps in helping to restore confidence in the U.S. banking system," Moody's said in its report. "Moody's believes that these actions will support greater stability for ratings of U.S. banks, although Moody's does not expect widespread upgrades of bank ratings to result from the programs."

The plan, revealed in a joint announcement by the U.S. Treasury, Federal Reserve and FDIC, will see up to $250 billion spent on equity injections in financial institutions and guarantees for non-interest deposits and senior bank debt.

The government will receive warrants to cover any losses, 5% dividends for the first five years and 9% dividends afterward. The Treasury so far plans to take stakes in nine "major financial institutions" but expects "thousands more." The banks who participate will be subject to executive compensation limits.

Importantly, Moody's noted, the newly issued preferred shares will be "pari passu" with other senior preferred securities, "and there are no provisions limiting dividends to be paid on existing preferred securities."

A second part of the plan involves the FDIC temporarily guaranteeing the senior debt of all insured institutions and their holding companies as well as deposits in all non-interest bearing deposit transaction accounts.

"These programs are clear and decisive in their ability to be executed quickly and to alleviate intermediate-term liquidity and capital adequacy concerns," the Moody's report continues. "However, Moody's does not expect that these programs will provide a full resolution of the challenges facing the US banking sector."

The ratings agency said the government's actions are likely to result in a reduction in the pace of negative rating actions and "major" considerations in recent rating reviews and downgrades, though the report said widespread upgrades are not expected.

"Systemic support already had been incorporated into our ratings for the larger banks, and the provision of support is likely to be temporary, with the result that the implications for long-term ratings are more limited," Moody's said.

"Further, ratings will continue to be influenced by underlying credit and franchise fundamentals utilizing Moody's established bank rating methodology; these government programs are intended to be temporary."

By Stephen Huebl and edited by Nancy Girgis
©CEP News Ltd. 2008