The huge exposure of the Commonwealth Bank, ANZ, NAB and Westpac to risky home loans has prompted a major ratings agency to downgrade its opinion of their safety.

Moody’s, a US firm that advises investors, cut its long-term measure of their creditworthiness from ‘AAA’ (the highest rating) to ‘AA’ (the second highest) on Monday night.

It did not change their short-term ratings, and it did not foresee any more imminent rating cuts.

Moody’s blamed its decision on the banks’ exposure to an economic downturn linked to the property market.

The agency said it feared heavily indebted households – who’ve been forced to borrow large amounts because of soaring prices – will stop spending if there is another economic shock, such as higher unemployment or higher interest rates.

“Any increase in household sector stress would have the potential to weaken consumer confidence and consumption, creating negative second and third order impacts on overall economic activity and, accordingly, bank balance sheets,” Moody’s said in a statement.

“The resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private sector indebtedness.”

It’s a problem well illustrated by a recent chart from the Reserve Bank of Australia, which showed housing prices are more than five times household income, and household debt well above 150 per cent of household income.

According to Bloomberg, more than 60 per cent of the loans made by Australian banks are for residential property, compared to less than 40 per cent in Canada, the US and Britain.

It was bad timing for Australia’s four largest banks, as Moody’s announcement followed closely the passing of the $6 billion bank levy in Parliament on Monday night. Their share prices and the Australian dollar fell on the news.

The banks are also bracing themselves for an announcement from the bank regulator, APRA, on whether it will require the banks to hold more capital as a fail-safe against their enormous mortgage lending.

Another of the global ratings agencies, S&P, downgraded almost all of Australia’s banks last month, but spared the big four.

Moody’s also downgraded eight smaller institutions on Monday. It pushed Bendigo and Adelaide Bank and Newcastle Permanent Building Society from AAA to AA, and Heritage Bank, ME bank, QT Mutual, Teachers Mutual, Victoria Teachers Mutual and Credit Union from AAA to BAA.

The downgrades could make it more expensive for banks to borrow funds in overseas money markets, such as New York, which could be passed on to customers and shareholders.

Moody’s full ratings list is: AAA, AA, A, BAA, BA, B, CAA, CA and C.