About 10 days ago, credit agency Moody’s Investors Service downgraded the US banking sector from “stable” to “negative.” In its latest update on Thursday, it said there are still risks to the U.S. economy. Moody’s managing director of credit strategy explained that the country is “unable to contain the current turmoil” and that it could spread “beyond the banking sector.”
Moody’s analysts are predicting more financial and economic damage from spillover effects in the U.S. banking
In a note issued Thursday, Atsi Sheth, Moody’s managing director of credit strategy, explainedthat the US may not be able to contain the banking turmoil that began two weeks ago. This commentary follows Moody’s recent downgrade of the U.S. banking industry from “stable” to “negative.” The credit agency applied the downgrade after three major U.S. banks failed and the contagion spread to other U.S. banks and several international financial institutions.
“The risk of financial turmoil spreading could unleash greater financial and economic damage than expected,” Moody’s analysts wrote. According to Moody’s, banks are not the only financial institutions that could be hit by the Federal Reserve’s consistent rate hikes.” Moody’s explains that “market scrutiny will be focused on troubled banks and entities exposed to similar risks.
The credit agency added:
[U.S. authorities] will not be able to contain the current turmoil without potentially more lasting and severe consequences, both within and outside the banking sector.
Moody’s credit analysts’ note is similar to thewarningFitch Ratings explained last week that other types of non-bank related institutions may feel the “knock-on effects” of banking contagion. Last October, Fitch Ratingspredictedthat a U.S. recession would occur in the spring of 2023. Moody’s analysts assume that growth will be constrained this year.
“Over the course of 2023, a variety of sectors and entities with existing credit challenges will face risks to their credit profiles as financial conditions remain tight and growth slows,” Moody’s analysts led by Sheth concluded Thursday.
What do you think should be done to mitigate the risk that disruptions in the U.S. banking sector could spill over to other financial institutions? Let us know your thoughts in the comments section below.
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