The subprime exposures of the major U.S. investment banks and institutionally active commercial banks do not have negative rating implications at this time, says Moody’s Investors Service.

The banks’ exposures relating to the turmoil in the subprime mortgage markets remain limited relative to the diversified earnings power of the firms, Moody’s stresses.

“The firms’ overall net position sizes in the subprime sector are modest relative to each firm’s capital and liquidity,” says Moody’s senior vice president Peter Nerby. “The diversification of each firm’s business is also allowing them to post solid firm-wide results, despite write-downs resulting from the severe decline in prices and evaporation of liquidity within the subprime sector.”

Among the U.S. commercial banks, Moody’s is primarily concerned about wholesale banks building up subprime-related trading or financing positions. Discussions with the four large U.S. commercial banks most active in the subprime market (Bank of America, Citigroup, J.P. Morgan Chase, and Wachovia) have led Moody’s to conclude that exposures are manageable relative to earnings capacity.

Among the commercial banks and investment banks, risk management has helped them navigate the subprime turmoil, the rating agency adds. Several market indicators are currently implying wide rating gaps relative to Moody’s current ratings. This may be explained by the opacity of disclosures regarding sub-prime risks and positions, which creates investor uncertainty, Moody’s says.

“A key factor underlying our stable ratings at these major wholesale firms is the day-to-day effectiveness of risk management, “says Nerby. “Our evidence suggests that risk management is working effectively during this stress period.”

As for the spreading of risk aversion to leveraged loans, Moody’s acknowledges that if market conditions stay weak, there will be additional mark-to-market losses on some over-hold positions, which would hurt third quarter results. With several large loan syndications recently failing, Moody’s says discussions on deals between private equity sponsors and arranging banks are ongoing, and the situation remains fluid.

“We are still analyzing the impact of the leveraged loan market situation on the liquidity position and concentration risks of each firm, and we will provide further updates on any potential rating implications it may have,” says Nerby. “On balance, we see this as a bigger issue for the investment banks, given their tiny base of core deposit funding and less diversified earnings, compared to the biggest U.S. commercial banks.”

Moody’s says it is maintaining an active dialogue with the five large U.S. investment banks that it rates: Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley. All have stable rating outlooks, except for Lehman Brothers, which has a positive outlook.