Moody's cuts US banking sector view to negative after banks collapse

By Al Mayadeen English
Source: Agencies
14 Mar 2023 22:09

The global rating agency's decision comes after the collapse of several banks in the US just a few days apart.

A Wall Street sign is seen in New York City, New York, US, October 26, 2020. (Reuters)

The US financial sector was dealt a new blow on Tuesday after Moody's global rating agency downgraded its outlook for the entire American banking system from stable to negative.

The agency's outlook has shifted following the "rapid deterioration" that struck the US banking sector after the crash of three banks only within a few days.

Last Friday, Silicon Valley Bank, America's 16th-largest bank, collapsed marking it the second-largest bank failure in US history, prompting regulators to seize its assets and halt trade on its stocks in Nasdaq.

SVB was shut down by US regulators on Friday after customers raced to withdraw $42 billion — a quarter of the bank's total deposits — in one day and a failed attempt to raise fresh capital cast doubt on the lender's survival

“We have changed to negative from stable our outlook on the US 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 said.

The decision came one day after the agency said it is weighing its decision to either downgrade the whole sector or reevaluate its view on seven institutions linked to the bank failures.

While the rating institution removed all ratings to SVB, Moody's placed the following financial institutions for review: First Republic, Intrust Financial, UMB, Zions Bancorp, Western Alliance, and Comerica.

Moody's downgrade will possibly impact the borrowing costs of the banking sectors as the decline of credit rating places the banks targeted as high-risk clients.

Despite praising the swift response by the government to shore up the failed banks, the agency said other institutions that have been indirectly impacted by the collapse or uninsured depositors may still be at risk.

To protect insured depositors, the FDIC established a new entity, the Deposit Insurance National Bank of Santa Clara

The Fed created a new facility that will provide access to cash to institutions that were impacted by liquidity problems, in an attempt to prevent a ripple effect to the rest of the sector. The US Treasury Department placed $25 billion into the program and pledged that depositors with uninsured capital (over $250,000 in their accounts) at both SVB and SNY will have full access to their funds.

But Moody’s expressed that the situation is still concerning.

“Banks with substantial unrealized securities losses and with non-retail and uninsured US depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings, and capital,” the report said.

Releasing a bid to sell $2.25 billion in shares last Wednesday, Silicon Valley Bank (SVB) attempted to close a gap in its balance sheet of $1.8 billion dollar, which was the result of the $21 billion sale of a portfolio holding mostly US treasuries at a 10-year 1.79% yield, vastly below the current treasury rates at 3.9% - which the Fed rose to attempt to battle inflation that recorded in May 2022 a four-decade high.

Moody's said it anticipates more rate hikes and expects the US economy to fall into recession later in the year.

“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,” it said. “US banks also now are facing sharply rising deposit costs after years of low funding costs, which will reduce earnings at banks, particularly those with a greater proportion of fixed-rate assets.”