Moody’s warns of more pain for US banks as sector downgrades

Ratings giant Moody’s has warned of more pain ahead for the US banking system after a run on deposits led to the collapse of Silicon Valley Bank.

Moody’s downgraded its outlook for the sector from “negative” to stable, warning of “a rapid deterioration in the business environment”.

The downgrade came as bank stocks in the US and Europe recovered from earlier losses.

But Moody’s said some other banks were at risk of customer withdrawals.

It said rising interest rates also pose a challenge, exposing banks that bought assets such as government bonds when interest rates were low to potential losses.

“Banks with substantial unrealized securities losses and with non-retail and uninsured U.S. depositors may still be more susceptible to deposit competition or ultimate flight,” Moody’s said in the report.

“We expect the pressure to persist and be exacerbated by the continued tightening of monetary policy, with interest rates likely to remain high longer until inflation returns to within the Fed’s target range.”

Authorities acted quickly to try to contain the fallout after the shocking collapse of Silicon Valley Bank (SVB), the 16th largest in the US.

The company, a major lender to technology companies, filed for bankruptcy last week following a wave of customer withdrawals sparked by the bank’s revelation that it was forced to raise money and was forced to sell a portfolio of assets, mostly government bonds, at a loss.

US regulators took over the bank and said they would guarantee deposits above the $250,000 level typically insured by the government. They have taken similar steps at the smaller Signature Bank.

Officials from the Justice Department and the Securities and Exchange Commission are now investigating the collapse, US media reported.

Reports have suggested that some clients of smaller US banks have tried to put their money in larger institutions.

Analysts expect the turmoil in the financial system fueled by the failures to cause the Fed to delay or pause its rate hikes when it meets next week.

That view gained traction on Tuesday after the latest inflation report showed US prices rose 6% in the 12 months to February, in line with expectations, boosting stocks.

When trading began on Tuesday, San Francisco-based First Republic Bank — which had seen its share price fall 62% on Monday — was up more than 50%, one of many companies whose shares were on a recovery. It eventually closed about 30% higher.

The three major stock indices were also up, with the Dow up 1%, the S&P 500 up 1.7% and the Nasdaq ending the day up more than 2%.

In the UK, bank stocks – which fell sharply on Monday – were all mostly higher on Tuesday afternoon. The FTSE 100 ended about 1.2%.

The European Stoxx banking index also opened lower on Tuesday, but then recovered to end nearly 3% higher.

But shares in HSBC, which bailed out SVB’s UK operations for £1, closed 1%, and there were heavy overnight losses in Japan, where big lenders like the country’s biggest bank, MUFG, pushed their share prices by more saw a fall of more than 8%.

An index of Japanese banking stocks known as the Topix Banks Index plummeted 7.4% despite reassurances from the Bank of Japan (BoJ).

“Japanese financial institutions’ direct exposure to Silicon Valley Bank is small, so the impact is likely to be limited,” said a BoJ official.