Moody's Cuts Outlook on U.S. Banking System to Negative, Citing ‘Rapidly Deteriorating Operating Environment'

Liu Guanguan | China News Service | Getty Images
  • Moody's Investors Service cut its view on the entire banking system to negative from stable.
  • The big three rating firm cited a "'rapidly deteriorating operating environment" despite regulators' efforts to shore up the industry.

In a harsh blow to an already-reeling sector, Moody's Investors Service cut its view on the entire banking system to negative from stable.

The firm, part of the big 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.

"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 in a report.

The move followed action late Monday, when Moody's warned it either was downgrading or placing on review for downgrade seven individual institutions.

The moves are important because they could impact credit ratings and thus borrowing costs for the sector.

In its downgrade of the entire sector, the rating agency noted the extraordinary actions taken to shore up impacted banks. But it said other institutions with unrealized losses or uninsured depositors still could be at risk.

The Federal Reserve established a facility to ensure that institutions hit with liquidity problems would have access to cash. The Treasury Department backstopped the program with $25 billion in funds and vowed that depositors with more 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 may still be more sensitive to depositor competition or ultimate flight, with adverse 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 would remove all ratings. It placed the following institutions under review for potential downgrades: First Republic, Intrust Financial, UMB, Zions Bancorp, Western Alliance and Comerica.

The firm noted that an extended period of low rates combined with Covid pandemic-related fiscal and monetary stimulus have complicated bank operations.

SVB, for instance, found itself with some $16 billion in unrealized losses from long-dated Treasurys it held. As yields rose, it eroded the value of those bonds and created liquidity issues for the bank, long a favorite of high-flying tech investors that couldn't get financing at traditional institutions. SVB had to sell those bonds at a loss to meet obligations.

Rates rose as the Federal Reserve battled an inflation surge that took prices to their highest levels in more than 40 years. Moody's said it expects the Fed to continue hiking.

"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 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."

The firm said it expects the U.S. economy to fall into recession later this year, further pressuring the industry.

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