Moody’s Downgrades Entire Banking Sector from Stable to Negative

Moody’s Investors Service has downgraded the entire US banking sector following the events in the past week.

Moody’s said it has changed its outlook from stable to negative.

This is a reflection of the events impacting Silicon Valley Bank (SVB), Signature Bank (SBNY), and Silvergate Bank (SI).  Both Silvergate and Signature were taken over by regulators.

Moody’s said that even though federal regulators have backstopped these banks and, at least implicitly, the entire banking sector by reassuring everyone all deposits will be accessible, the ratings agency said that the “rapid and substantial decline in bank depositor and investor confidence precipitating this action starkly highlight risks in US banks’ asset-liability management (ALM) exacerbated by rapidly rising interest rates.”

Moody’s added that the problems of SVB, SI and SBNY are symptomatic of a “negative turn in the US bank credit cycle.”

The above banks were impacted by the fast-rising interest rates causing long-duration assets to decline in value. While these banks held cash on their books, much of the deposit funds were held in government securities or mortgage-backed securities that were long-term.  In general, bonds have an inverse relationship to interest rates. When rates rise, bond prices go down.

In the sector comment, Moody’s stated:

“While these three banks were unique in their focus on crypto and venture capital/private equity – areas of non-bank finance that grew quickly during easy monetary policy – it is increasingly evident that other US banks are also facing ALM strains. As we have highlighted in previous research, the very steep increase in the fed funds rate and withdrawal of unconventional monetary policy are combining to reduce bank deposits and weaken bank liquidity, which has exacerbated challenges for some US banks in weathering this cycle. Some US banks also have demonstrated weak governance and oversight of ALM risk.”

The firm did note that “banks are generally well capitalized to face the deteriorating operating environment, but unrealized securities losses are a headwind.”

Moody’s said that ALM risk will remain high through the current monetary policy tightening.

The US Federal Reserve is scheduled to meet on March 22nd, with some predicting the Fed will pause or increase by 25 bps as it attempts to manage the very volatile situation.

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