Following the failure of three major U.S. banks last week, two of which were the second and third largest bank failures in the country, Moody’s Investors Service has downgraded the U.S. banking system rating to “stable” to “negative.” Moody’s, one of the “Big Three” rating agencies, cited the “rapidly deteriorating business environment” as the reason for the failure of these banks.
Moody’s Downgrades U.S. Banks, Financial Institutions Face Higher Deposit Costs and Lower Earnings
U.S. rating agency Moody’s Investors Service has downgradedthe U.S. banking sector from “stable” to “negative”. The agencycitedthe failure of three banks within seven days in the U.S. last week as the reason. Silvergate Bank decided to voluntarily liquidate and Silicon Valley Bank (SVB) experienced a major bank run last Thursday.
After the FDIC placed SVB into receivership, New York regulators revealed Sunday that the FDIC also acquired Signature Bank.SVB’s failure was the second largest bank failure since2008, when Washington Mutual (Wham )failed, and Signature’s failure was the third largest after SVB.
“We have changed our outlook on the U.S. banking system from stable to negative, reflecting the rapid deterioration in the operating environment following the deposit outflows of Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the failure of SVB and SNY.” Moody’s released more details on Monday.
The credit agency also said that although the U.S. government bailed out depositors, “the rapid and significant decline in bank depositor and investor confidence that triggered this action vividly highlights the risks to U.S. bank asset and liability management (ALM), exacerbated by the sharp rise in interest rates.”
MIS analysts said that while the Federal Reserve’s backstopping liquidity facility for banks is beneficial and could improve the situation, “banks with large unrealized securities losses and non-retail and uninsured U.S. depositors are still more susceptible to depositor competition and ultimate flight remain more sensitive and could have an adverse impact on funding, liquidity, profits, and capital.”
MIS refers to a recentpreparedby the U.S. central bank. Bank Term Financing Program (BTFP), which was announced after Treasury Secretary Janet Yellen revealed the SVB and Signature bailout.
Moreover, Goldman Sachs and other market participants believe that Fed Chair Powell and the Federal Reserve will not raise rates this month, while Moody’s believes that the central bank’s monetary tightening process should proceed.” Our base case is that continued Fed monetary tightening could deepen challenges for some banks,” the MIS report emphasized.
“Pressures are expected to persist and be exacerbated by the ongoing recession.