Fitch puts three U.S. banks on review for downgrade

By Lauren Tara LaCapra

(Reuters) - Fitch Ratings downgraded UBS AG on Thursday and placed seven other U.S. and European banks on credit watch negative, citing challenges in the economy and financial markets, as well as the impact of new regulations.

The ratings agency lowered UBS's long-term issuer default rating to A from A+.

Fitch is also reviewing ratings for Barclays Bank Plc , BNP Paribas , Credit Suisse Group AG , Deutsche Bank AG , Societe Generale , Bank of America Corp , Morgan Stanley and Goldman Sachs Group Inc for further possible downgrades.

The cuts would in most cases be one notch and in some cases two notches, Fitch said. A lower bond rating can make debt more expensive to issue and lead to higher collateral requirements.

Earlier on Thursday, Fitch also lowered its ratings on Royal Bank of Scotland and Lloyds Banking Group PLC two notches to A from AA-.

Exposure to the European debt crisis and concern about the business model of pure-play investment banks were catalysts for most of the ratings actions, Joo-Yung Lee, a managing director in Fitch's financial institutions group, told Reuters.

"Some of these banks have greater reliance on wholesale funding and greater reliance on what we view as volatile trading earnings," Lee said. "That's particularly true of Goldman Sachs and Morgan Stanley in the U.S. They are less diverse than their global universal bank peers."

In the case of Bank of America, its exposure to mortgage-related litigation was a driver for Fitch's review. Competitors like Wells Fargo & Co and JPMorgan Chase & Co were not targeted because they have diverse business models, steady funding streams and no company-specific issues that put them at serious risk, Lee said.

Fitch does not have a specific deadline to finish its review, but Lee said it hopes to resolve the matter quickly to reduce market uncertainty.

(Additional reporting by Herb Lash in New York; Editing by Gary Hill)