After the collapse of three major U.S. banks last week, two of which were the second and third largest banking failures in the country, Moody’s Investors Service has downgraded the rating of the U.S. banking system from “stable” to “negative.” As one of the “Big Three” credit rating firms, Moody’s pointed to a “rapid deterioration in the operating environment” that followed the extensive bank failures.
Moody’s Downgrades U.S. Banks, Financial Institutions Face Increasing Deposit Costs and Reduced Revenue
Moody’s Investors Service, the leading credit rating agency, has downgraded the U.S. banking sector from “stable” to “negative.” The cause of the downgrade was attributed to the recent collapse of three U.S. banks within a span of seven days. Silvergate Bank was forced to liquidate, while Silicon Valley Bank (SVB) experienced a massive bank run last Thursday.
The FDIC took over SVB and disclosed that they had also taken control of Signature Bank on Sunday. SVB’s failure ranks as the second-largest banking failure since Washington Mutual (Wamu) in 2008, and Signature’s failure is the third-largest following SVB’s.
“We have changed to negative from stable our outlook on the U.S. banking system to reflect the rapid deterioration in the operating environment following deposit runs at Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the failures of SVB and SNY,” Moody’s stated on Monday.
The credit agency also noted that even though the U.S. government has assured depositors that they will receive their funds, “the rapid and substantial decline in bank depositor and investor confidence precipitating this action starkly highlight risks in U.S. banks’ asset-liability management (ALM) exacerbated by rapidly rising interest rates.”
MIS analysts remarked that while the U.S. Federal Reserve’s backstopping liquidity facility for banks can be beneficial, “banks with substantial unrealized securities losses and with non-retail and uninsured U.S. depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings, and capital.”
MIS is referring to the U.S. central bank’s recently created Bank Term Funding Program (BTFP), which was announced after Treasury secretary Janet Yellen revealed that SVB and Signature would be bailed out.
Although Goldman Sachs and other market participants think Fed chair Jerome Powell and the Federal Reserve won’t raise rates this month, Moody’s thinks the central bank should press on with its monetary tightening process. “Our base case is for the Fed’s monetary tightening to continue, which could deepen some banks’ challenges,” the MIS report emphasized.
“We expect pressures to persist and be exacerbated by ongoing monetary policy tightening, with interest rates likely to remain higher for longer until inflation returns to within the Fed’s target range,” Moody’s said. The credit agency also mentioned that U.S. banks are now faced with increasing deposit costs, which will result in reduced revenue.
What are your thoughts on the downgrading of the U.S. banking system by Moody’s and its potential impact on the economy? Let us know in the comments section below.
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