The credit rating agency Moody’s has lowered its outlook on the US banking system from “stable” to “negative” to reflect the deterioration in the sector after the collapse of Silicon Valley Bank (SVB), Silvergate Bank and Signature Bank (SNY) and difficulties in a challenging rate environment.
The magnifying glass is placed especially on smaller entities. Moody’s has also placed the ratings of First Republic Bank – which sank 60% on the stock market this Monday -, Comerica, Zions, UMB Financial, Intrust and Western Alliance on review for downgrade. Their volatile financing conditions are weighed down by exposure to the outflow of uninsured deposits, those that exceed $250,000.
Although the Treasury, the Federal Reserve and the banking regulator FDIC have offered support to the clients of the entities, Moody’s understands that the rapid and substantial decline in the confidence of depositors and investors clearly highlights the risks in the management of assets and liabilities. of US banks.
In this sense, Moody’s expects that the pressures will persist and will be exacerbated by the current tightening of monetary policy, in addition to the increase in the costs of deposits, which will reduce the profits of banks, particularly those with a higher proportion of assets. fixed income. “Our base case is for continued Fed tightening, which could deepen challenges for some banks,” it argues.
Furthermore, Moody’s anticipates that the US will enter a mild recession in the latter part of 2023, with real GDP growth remaining below trend in 2024, with the unemployment rate gradually increasing. On the one hand, it will harm the business of the entities due to the lower activity, but it will allow inflation to decrease, with which the Fed would move to a neutral rate policy stance in 2025.
