The government is more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, the ratings agency said.
Moody's decision hit Bank of America hardest as it cut both the long-term and short-term debt of the holding company and long-term deposits at its lead bank. The ratings agency cut only the short-term debt of Citigroup and limited the Wells' cut to its senior debt and to deposits at its lead bank.
Bank of America, the largest U.S. bank by assets, is struggling with billions of dollars of mortgage losses, litigation and stresses from the need to raise capital to meet new regulatory obligations.
The risk of contagion from one failing bank to other banks has become less acute, Moody's noted, adding the Dodd-Frank financial reform law of 2010 has reduced the ties between financial institutions.
When investment bank Lehman Brothers unexpectedly failed in September 2008, its debt and counterparty obligations created shockwaves throughout the global financial system.
Moody's said laws being written about systemically important U.S. banks pass the burden of losses to bondholders of individual banks and away from the U.S. government and taxpayers.
The ratings agency signaled its review of a possible downgrade of the banks in June.
Bank of America's shares fell 4 percent to $6.62 in afternoon New York Stock Exchange trading. Citigroup shares were down 27 cents, or about 1 percent, at $26.64, and Wells Fargo shares slid 11 cents to $24.56.
Moody's downgraded Bank of America's long-term senior debt rating to Baa1 from A2 and its short-term debt rating to Prime 2 from Prime 1.
Citigroup's short-term rating was cut to Prime 2 from Prime 1. Moody's affirmed the long-term ratings of the third-largest U.S. bank holding company at A3, and affirmed the short- and long-term ratings of its Citibank subsidiary at A1 and Prime-1, respectively.
Wells Fargo & Co's long-term rating was cut to A2 from A1 and the rating on deposits at its Wells Fargo Bank unit was cut to Aa3 from Aa2.
Moody's said the long-term outlook on the three banks' ratings remains negative.
Bank of America said through a spokesman that the downgrade was due to forces beyond its control and asserted that it has a healthy liquidity cushion of $400 billion. All of its planned borrowing needs have been prefunded for the rest of 2011, the spokesman said.
Citigroup said in a statement that Moody's downgrade affects less than 1 percent of its funding. The decision will not affect its funding needs, it said.
(Reporting by Joe Rauch in Charlotte, North Carolina; Additional reporting by David Henry and Jon Stempel in New York; editing by Andre Grenon and Maureen Bavdek)
(This story was corrected in paragraph four to show Bank of America is largest U.S. bank by assets, not second largest)