The importance of the bond insurers' financial health to the wider financial services industry was underscored by the S&P report. The sector has already taken more than $100 billion in write-downs on sub-prime related assets and bad loans.
Regulators including New York Insurance Commissioner Eric Dinallo have been in talks to shore up insurers' capital. A group of the largest banks has joined together to look for ways to shore up Ambac Financial Group Inc, the second-largest bond insurer, two people briefed on the talks said Friday.
The Wall Street Journal on Tuesday reported that a third bond insurer -- Financial Guaranty Insurance Co, which was downgraded by Fitch Ratings last week -- was the target of another rescue bid by a group of banks, though it said the talks were in a preliminary phase.
One analyst estimated last week that U.S. financial institutions would face as much as $70 billion in new write-downs in 2008 if bond insurers lost their top "AAA" ratings.
S&P echoed concern about the ripple effect from bond insurer downgrades.
"We believe that the specific, identifiable effect on banks may be significant and, in a few cases, could lead to downgrades. Large global institutions have direct exposure to the bond insurers in a number of ways," credit analyst Tanya Azarchs said in a report.