Moody’s downgraded outlook for US banking system to negative, citing ‘rapidly deteriorating business environment’

Liu Guanguan | Chinese news service | Getty Images

In a harsh blow to an already shaky industry, Moody’s Investors Service on Monday downgraded its view on the entire banking system from negative to stable.

The company, part of the three major rating agencies, said it made the move in light of major bank failures that prompted regulators to step in on Sunday with a dramatic bailout for depositors and other institutions hit by the crisis.

“We have changed our outlook for the US banking system to negative from stable to reflect the rapid deterioration in the business environment following deposit runs at Silicon Valley Bank (SVB), Silvergate Bank and Signature Bank (SNY) and the bankruptcies of SVB and SNY, Moody’s said in a report.

The move followed action late Monday, when Moody’s warned it was either being downgraded or placed in review for a downgrade of seven individual institutions.

The movements are important because they can affect creditworthiness and thus the financing costs for the sector.

When downgrading the entire sector, the rating agencies pointed to the extraordinary measures taken to support the sector. But it said other banks with unrealized losses or uninsured depositors could still be at risk.

The Federal Reserve has set up a facility to ensure that institutions affected by liquidity problems have access to cash. Treasury stopped the program with $25 billion in funds and promised depositors with more than $250,000 at SVB and Signature would have full access to their funds.

But Moody’s said concerns remain.

“Banks with substantial unrealized securities losses and with unretailed and uninsured U.S. depositors may still be more susceptible to deposit competition or eventual flight, with adverse effects on funding, liquidity, revenues and capital,” the report said.

Bank shares rose sharply despite the downgrade. Exchange-traded fund SPDR Bank rose nearly 6.5% in morning trading. Major indices were also higher, with the Dow Jones Industrial Average up nearly 450 points or 1.4%.

Moody’s downgraded Signature Bank on Monday, saying it would remove all ratings. The following institutions were assessed for possible downgrades: First Republic, INTRUST Financial, UMB, Zions Bancorp, Western Alliance and Comerica.

The company noted that a prolonged period of low rates coupled with pandemic fiscal and monetary stimulus has complicated banking operations.

SVB, for example, found itself with some $16 billion in unrealized losses on long-dated government bonds it held. As yields rose, it eroded the principal value of those bonds and created liquidity problems for the bank, long a favorite of high-flying tech investors who couldn’t get funding from traditional institutions. SVB had to sell those bonds at a loss to meet its obligations.

Rates rose as the Federal Reserve struggled with an inflationary rise that pushed prices to their highest level in more than 40 years. Moody’s said it expects the Fed to continue raising rates.

“We expect the pressure to persist and be exacerbated by the continued tightening of monetary policy, with interest rates likely to remain elevated for longer until inflation returns to within the Fed’s target range,” Moody’s said. “U.S. banks are also now facing sharply rising deposit costs after years of low borrowing costs, which will reduce revenues at banks, especially those with a higher share of fixed-income assets.”

The company said it expects the U.S. economy to enter a recession later this year, putting further pressure on the industry.





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