After Friday's Downgrades, More Pain in the Banking Sector

What's happening in the headlines can affect you as an investor. Here's a look at the past couple days in the banking sector and what's causing a larger sell-off today.

The cold, hard facts
On Friday, Fitch Ratings, one of the big three ratings agencies, cut its long-term ratings for seven banks in the U.S. and Europe. Today, the pain is being felt.

Both BNP Paribas (Paris: BNP.PA) and Deutsche Bank (XETRA: DBK.DE) had their long-term issuer default rating downgraded by one notch to A+. Bank of America (NYS: BAC) , Citigroup (NYS: C) , and Goldman Sachs (NYS: GS) were all downgraded from A+ to A. Barclays (NYS: BCS) and Credit Suisse (NYS: C) were downgraded two notches to A.

Some context
Fitch gave its rationale for the downgrades: "Over time market conditions are likely to ease, but Fitch expects market volatility to remain above historical averages and economic growth in developed markets to remain subdued for a prolonged period. This makes many business lines in securities operations more difficult, due to lower activity and higher funding costs."

Fitch did note the banks' progress in building up capital and liquidity buffers, but warned that "new regulation could exacerbate the banks' difficulties by restricting their earnings potential and increasing costs."

What you need to know
On Friday, it seemed that the equity markets were ignoring the downgrades, which is not a huge surprise. Remember what happened when Standard & Poor's downgraded America's credit rating over the summer? Investors flocked to U.S. Treasuries, lowering yields to record levels.

The ratings agencies traditionally operate behind the curve, only confirming what investors already know, or miss the boat entirely, best exemplified by the triple-A ratings they gave the toxic securities that eventually crashed the financial system.

However, when the president of the European Central Bank weighed in with negative outlook for 2012, investors finally acted. Banking stocks are leading the markets south today, with both Bank of America and Citi seeing losses over 3% in midday trading.

Chances are, if you're invested in any of the above-mentioned banks, you already know the state of their balance sheet -- and the uncertainty surrounding the value and type of assets on it -- and are keeping a watchful eye. If you're not invested in any of these banks, with their exposure to tottering eurozone sovereign debt very difficult to determine, now's not the time to get in.

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At the time this article was published Fool contributorJohn Grgurichloves the smell of newsprint in the morning, but he owns no shares of any of the companies mentioned above. The Motley Fool owns shares of Citigroup and Bank of America. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has a scintillatingdisclosure policy.

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