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In a harsh blow to an already-reeling sector, Moody’s Investors Service cut its view on the whole banking system to negative from stable.
The firm, a part of the large three rating services, said Monday it was making the move in light of key bank failures that prompted regulators to step in Sunday with a dramatic rescue plan for depositors and other institutions impacted by the crisis.
“Now we have modified to negative from stable our outlook on the US banking system to reflect the rapid deterioration within 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 said in a report.
The move followed motion late Monday, when Moody’s warned it either was downgrading or placing on review for downgrade seven individual institutions.
The moves are necessary because they might impact credit rankings and thus borrowing costs for the sector.
In its downgrade of the whole sector, the rating agency noted the extraordinary actions taken to shore up impacted banks. However it said other institutions with unrealized losses or uninsured depositors still could possibly be in danger.
The Federal Reserve established a facility to be sure that institutions hit with liquidity problems would have access to money. The Treasury Department backstopped this system with $25 billion in funds and vowed that depositors with greater than $250,000 at SVB and Signature would have full access to their funds.
But Moody’s said that concerns remain.
“Banks with substantial unrealized securities losses and with non-retail and uninsured US depositors should be more sensitive to depositor competition or ultimate flight, with hostile effects on funding, liquidity, earnings and capital,” the report said.
Bank stocks rallied strongly despite the downgrade. The SPDR Bank exchange-traded fund rose nearly 6.5% in morning trade. Major indexes also were higher, with the Dow Jones Industrial Average up nearly 450 points, or 1.4%.
Moody’s on Monday downgraded Signature Bank and said it might remove all rankings. It placed the next institutions under review for potential downgrades: First Republic, Intrust Financial, UMB, Zions Bancorp, Western Alliance and Comerica.
The firm noted that an prolonged period of low rates combined with Covid pandemic-related fiscal and monetary stimulus have complicated bank operations.
SVB, as an illustration, found itself with some $16 billion in unrealized losses from long-dated Treasurys it held. As yields rose, it eroded the principle value of those bonds and created liquidity issues for the bank, long a favourite of high-flying tech investors that couldn’t get financing at traditional institutions. SVB needed to sell those bonds at a loss to satisfy obligations.
Rates rose because the Federal Reserve battled an inflation surge that took prices to their highest levels in greater than 40 years. Moody’s said it expects the Fed to proceed mountain climbing.
“We expect pressures to persist and be exacerbated by ongoing monetary policy tightening, with rates of interest prone to remain higher for longer until inflation returns to inside the Fed’s goal range,” Moody’s said. “US banks also now are facing sharply rising deposit costs after years of low funding costs, which can reduce earnings at banks, particularly those with a greater proportion of fixed-rate assets.”
The firm said it expects the U.S. economy to fall into recession later this yr, further pressuring the industry.
