In a blow to the already troubled sector, Moody’s Investors Service on Monday cut its outlook on the entire banking system to negative from stable.
The firm, part of the Big-Three ratings services, said it was taking steps in light of major bank failures that prompted regulators to step in Sunday with a dramatic rescue plan for depositors and other institutions hit by the crisis. .
“Our outlook on the US banking system has changed from stable to negative to reflect a sharp deterioration in the operating environment following the deposit run at Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the SVB failures. SNY,” Moody’s said in a report.
The move followed the action late Monday, when Moody’s warned it was either downgrading or reviewing seven separate institutions for downgrades.
The steps are important as they can affect the credit rating and thus the cost of borrowing for the sector.
In their downgrade of the entire sector, the rating agencies noted the extraordinary actions taken to shore up the affected banks. But it said other institutions with unrealized losses or uninsured depositors may still be at risk.
The Federal Reserve established a facility to ensure that institutions struggling with liquidity problems would have access to cash. Treasury froze the program with $25 billion in funds and pledged that depositors over $250,000 in SVB and Signature would have full access to their funds.
But Moody’s said concerns remain.
“Banks with substantial unrealized securities losses and non-retail and uninsured U.S. depositors may still be more vulnerable to depositor competition or eventual flight, which could have adverse effects on funding, liquidity, earnings and capital,” the report said. have an adverse effect.”
Bank stocks rallied strongly despite the downgrade. The SPDR Bank exchange-traded fund rose nearly 6.5% in morning trade. Major indexes were also higher, with the Dow Jones Industrial Average up nearly 450 points, or 1.4%.
Moody’s on Monday downgraded Signature Bank’s rating and said it would remove all ratings. It placed the following institutions under review for possible downgrade: First Republic, Intrust Financial, UMB, Zions Bancorp, Western Alliance and Comerica.
The firm noted that the fiscal and monetary stimulus related to the pandemic, along with an extended period of low rates, has complicated bank operations.
For example, SVB found itself with unrealized losses from long-dated Treasuries of about $16 billion. As yields rose, this reduced the principle value of those bonds and created liquidity issues for the bank, which had long been a favorite of high-flying tech investors who can’t get financing at traditional institutions. Were. To meet the obligation, SVB had to sell those bonds at a loss.
Rates rose as the Federal Reserve battled a surge in inflation that drove prices to their highest levels in more than 40 years. Moody’s said it expects the Fed to continue hiking.
“We expect continued monetary policy tightening pressures to remain high and interest rates to remain on hold until inflation returns to the Fed’s target range,” Moody’s said. “US banks also now face sharply rising deposit costs after years of low funding costs, which will drag down banks’ earnings, especially those with a higher proportion of fixed-rate assets.”
The firm said it expected the US economy to slip into recession later this year, putting further pressure on the industry.