After the failure of three major U.S. banks recently, with 2 of them being the 2nd and 3rd biggest banking failures in the nation, Moody’s Investors Service has actually reduced the score of the U.S. banking system from “stable” to “negative.” As one of the “Big Three” credit score companies, Moody’s mentioned a “rapid deterioration in the operating environment” following the collapse of these banks.
Moody’s Downgrades U.S. Banks, Financial Institutions Face Rising Deposit Costs and Reduced Earnings
Moody’s Investors Service, the American credit score firm, has actually reduced the U.S. banking sector from “stable” to “negative.” The firm mentioned the collapse of three banks within 7 days in the United States recently. Silvergate Bank chose to willingly liquidate, and Silicon Valley Bank (SVB) experienced a big bank run last Thursday.
After the FDIC put SVB into receivership, New York regulators exposed that the FDIC also took control of Signature Bank on Sunday. SVB’s collapse was the second-largest banking failure considering that Washington Mutual (Wamu) in 2008, and Signature’s failure was the third-largest following SVB’s.
“We have changed to negative from stable our outlook on the U.S. banking system to reflect the rapid deterioration in 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 detailed on Monday.
The credit firm included that although the U.S. federal government made depositors entire, “the rapid and substantial decline in bank depositor and investor confidence precipitating this action starkly highlight risks in U.S. banks’ asset-liability management (ALM) exacerbated by rapidly rising interest rates.”
MIS experts specified that while the U.S. Federal Reserve’s backstopping liquidity center for banks is advantageous and might assist the scenario, “banks with substantial unrealized securities losses and with non-retail and uninsured U.S. depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings, and capital.”
MIS is referring to the U.S. reserve bank’s just recently produced Bank Term Funding Program (BTFP), which was revealed after Treasury secretary Janet Yellen exposed that SVB and Signature would be bailed out.
Moreover, while Goldman Sachs and other market individuals think Fed chair Jerome Powell and the Federal Reserve won’t raise rates this month, Moody’s believes the reserve bank’s financial tightening up procedure needs to continue. “Our base case is for the Fed’s monetary tightening to continue, which could deepen some banks’ challenges,” the MIS report stressed.
“We expect pressures to persist and be exacerbated by ongoing monetary policy tightening, with interest rates likely to remain higher for longer until inflation returns to within the Fed’s target range,” Moody’s stated. The credit firm included that U.S. banks now deal with increasing deposit expenses, which will lead to decreased incomes.
What do you believe the effect of the downgrading of the U.S. banking system by Moody’s will be on the economy? Share your ideas in the comments area below.
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