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Moody’s Downgrades US Banking Sector to Negative After Collapse of Three Major Banks

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Moody’s Downgrades US Banking Sector to Negative After Collapse of Three Major Banks

After the failure of three major U.S. banks last week, with two of them being the second and third largest banking failures in the country, Moody’s Investors Service has downgraded the rating of the U.S. banking system from “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 U.S. Banks, Financial Institutions Face Rising Deposit Costs and Reduced Earnings

Moody’s Investors Service, the American credit rating agency, has downgraded the U.S. banking sector from “stable” to “negative.” The agency cited the collapse of three banks within seven days in the United States last week. Silvergate Bank decided to voluntarily liquidate, and Silicon Valley Bank (SVB) experienced a large bank run last Thursday.

After the FDIC placed SVB into receivership, New York regulators revealed that the FDIC also took over Signature Bank on Sunday. SVB’s collapse was the second-largest banking failure since 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 agency added that even though the U.S. government made depositors whole, “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 analysts stated that while the U.S. Federal Reserve’s backstopping liquidity facility for banks is beneficial and could help the situation, “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. central bank’s recently created Bank Term Funding Program (BTFP), which was announced after Treasury secretary Janet Yellen revealed that SVB and Signature would be bailed out.

Moreover, while Goldman Sachs and other market participants believe Fed chair Jerome Powell and the Federal Reserve won’t raise rates this month, Moody’s thinks the central bank’s monetary tightening process should proceed. “Our base case is for the Fed’s monetary tightening to continue, which could deepen some banks’ challenges,” the MIS report emphasized.

“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. The credit agency added that U.S. banks now face rising deposit costs, which will result in reduced earnings.

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What do you think the impact of the downgrading of the U.S. banking system by Moody’s will be on the economy? Share your thoughts in the comments section below.

Jamie Redman

Jamie Redman is the News Lead at Bitcoin.com News and a financial tech journalist living in Florida. Redman has been an active member of the cryptocurrency community since 2011. He has a passion for Bitcoin, open-source code, and decentralized applications. Since September 2015, Redman has written more than 6,000 articles for Bitcoin.com News about the disruptive protocols emerging today.

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