Moody’s Cuts Outlook on U.S. Banking System From Stable to Negative!

The big three bank rating firm cites a “rapidly deteriorating operating environment” despite Treasury and regulatory agencies’ efforts to shore up the industry.

The Federal Reserve’s rapid rate hikes to reduce inflation may have set off a banking crisis virtually no one saw coming.

Moody’s Investors Service cut its view on the entire banking system to negative from stable because of key banking failures that have forced regulators to step in Sunday with a dramatic rescue plan for depositors and other institutions impacted by the crisis. In a report released by Moody’s, it said…

“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.”

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The downgrade of the entire banking sector is crucial because it will likely impact the credit ratings, which will hike the borrowing costs for the whole sector. More importantly, in Moody’s downgrade of banking as the whole center sector, Moody’s warned that the extraordinary actions taken to shore up impacted banks resulted from the substantial number of institutions with unrealized losses or uninsured depositors still at risk.

While the Federal Reserve established a facility to ensure that institutions hit with liquidity problems would have access to cash. The U.S. Treasury program is funded with $25 billion in funds to protect depositors with more than $250,000 at SVB, and Signature is designed to give them full access to their funds.

But Moody’s, in its Monday report, expressed concerns that the crises may not be limited to just the seven named banking institutions…

“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.”

The stock market, however, and the bank sector ignored Moody’s report and rallied strongly despite the downgrade. The SPDR Bank exchange-traded fund rose nearly 6.5% in morning trade. Major indexes, including all the major indexes, the Dow, S&P, Nasdaq, and even the Russell, remain in positive territory.

Moody’s report noted that an extended period of low rates combined with Covid pandemic-related fiscal and monetary stimulus have complicated bank operations.

SVB, like other banks, has found itself with billions of dollars of unrealized losses from long-dated Treasurys it held as the Federal Reserve quickly hiked interest rates to battle inflation. As yields rose, the principal value of those bonds plummeted and went ignored by many banks. The plummet in value forced SVB to sell those bonds for tremendous losses to meet obligations. This has created a liquidity crisis for SVB and many other banks that are favored by high-flying tech companies that couldn’t get financing at traditional institutions.

The losses are directly tied to the Federal Reserve raising interest rates to the highest in more than 40 years. Moody said in its Monday report that t expects the Federal Reserve to continue to hike interest rates with inflation still at 6% - and for more banks to suffer liquidity issues.

“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.”

“U.S. 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.”

Moody’s is the first widely followed rating agency to make it clear that it expects the U.S. economy to fall into recession later this year, further pressuring the industry.

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                       Moody’s downgrades U.S. bank sector to Negative: Report