Moody’s Investors Service delivered a harsh blow to the banking sector on Monday by downgrading its outlook from stable to negative. However, this move comes amidst critical bank failures that triggered regulatory actions, leading to a dramatic rescue plan for depositors and other institutions affected by the crisis. It serves as yet another reminder of how deeply the sector is suffering.
Moody’s announced that they have changed their outlook on the U.S. banking system from stable to negative in response to deposit runs at Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY), as well as the subsequent failure of SVB and SNY. This follows their earlier announcement late Monday when Moody’s warned of downgrades or reviews for the downgrade of seven individual institutions. These actions are significant as they can potentially impact the banking sector’s credit ratings and borrowing costs.
Moody Investors downgrades the banking sector
Moody’s has downgraded the entire banking sector due to extraordinary actions to shore up impacted banks. However, Moody’s warned that institutions with unrealized losses or uninsured depositors could still be at risk. In response, the Federal Reserve created a facility to provide liquidity to affected banks. At the same time, the Treasury Department pledged $25 billion in funds to ensure depositors with more than $250,000 at SVB and Signature would be fully protected. Despite these measures, Moody’s cautioned that risks remain.
Moody’s downgraded Signature Bank on Monday and announced it would remove all ratings for six other institutions: First Republic, Intrust Financial, UMB, Zions Bancorp, Western Alliance, and Comerica. The firm cited the extended period of low-interest rates along with the Covid-19 pandemic-related fiscal and monetary stimulus measures as further complicating the operations of banks. All six institutions are currently under review for potential downgrades.
As yields rose, SVB was left with $16 billion in unrealized losses from long-dated Treasury bonds they held. This eroded the principal value of those bonds and created liquidity issues for the bank, which had become a go-to institution for high-tech investors seeking financing that traditional institutions could not provide. To meet their obligations, SVB had to sell those bonds at a loss. In addition, the Federal Reserve’s efforts to battle an inflation surge drove rates to unseen levels in more than 40 years and Moody’s projects that the Fed will continue raising them.
Moody also forecasts that the U.S. economy will likely fall into recession later this year, thus, creating further pressure on the banking industry.
Moody’s outlook sparks reactions
There have been many reactions following Moody’s predictions and outlook on the banking industry.
