Following the failure of three major US banks last week, two of which were the second and third largest bank failures in the country, Moody’s Investors Service has downgraded the US banking system’s rating to ” stable” to “negative”. As one of the “big three” credit rating firms, Moody’s cited a “rapid deterioration in the operating environment” following the collapse of these banks.
Moody’s downgrades US banks, financial institutions face rising deposit costs and reduced profits
Moody’s Investors Service, the US credit rating agency, has degraded the US banking sector from “stable” to “negative”. The agency aforementioned the collapse of three banks in seven days in the United States last week. Silvergate Bank decided to voluntarily liquidate and Silicon Valley Bank (SVB) experienced a huge bank run last Thursday.
After the FDIC placed SVB in receivership, New York regulators revealed that the FDIC also took over Signature Bank on Sunday. The collapse of SVB was the second biggest bank failure since Mutual Washington in 2008, and Signature’s failure was the third biggest after SVB’s.
“We have changed our outlook on the US banking system from stable to negative to reflect the rapidly deteriorating operating environment following runs on deposits at Silicon Valley Bank (SVB), Silvergate Bank and Signature Bank (SNY) and the bankruptcies of SVB and SNY”, detailed Moody’s on Monday.
The credit bureau added that despite the US government restitution to depositors, “the rapid and substantial decline in bank depositor and investor confidence that this action precipitated clearly highlights the risks in asset management and liabilities (ALM) of US banks exacerbated by rapidly rising interest rates. ”
MIS analysts stated that while the US Federal Reserve’s liquidity support facility for banks is beneficial and could help the situation, “banks with substantial unrealized securities losses and with depositors Non-retail, uninsured Americans may still be more sensitive to depositor competition or eventual flight, with adverse effects on funding, liquidity, earnings, and capital.”
MIS refers to the US central bank recently created Bank Term Funding Program (BTFP), which was announced after Treasury Secretary Janet Yellen revealed that SVB and Signature would be bailed out.
Furthermore, while Goldman Sachs and other market participants believe that Fed Chairman Jerome Powell and the Federal Reserve will not raise rates this month, Moody’s believes that the central bank’s tightening process should continue. “Our base case is for continued Fed tightening, which could deepen challenges for some banks,” the MIS report emphasized.
“We expect pressures to persist and be exacerbated by the ongoing monetary policy tightening, with interest rates likely to remain high for longer until inflation returns to the Fed’s target range,” Moody’s said. The credit bureau added that US banks now face rising deposit costs, which will result in reduced profits.
What do you think will be the impact of Moody’s downgrading of the US banking system on the economy? Share your thoughts in the comments section below.
image credits: Shutterstock, Pixabay, Wiki Commons, Daniel J. Macy / Shutterstock.com
Disclaimer: This article is for informational purposes only. It is not a direct offer or a solicitation of an offer to buy or sell, or a recommendation or endorsement of any product, service or company. bitcoin.com does not provide investment, tax, legal or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
