Moody’s Downgrades Entire Banking System To ‘Negative’

Moody’s Investors Service was one of three leading rating agencies and downgraded the rating of the entire system of banks from stable to negativity in response to the SVB bank crisis.

Moody’s, who had forecast a coming recession, warned it would lower the ratings of Comerica and First Republic, Intrust Financial. UMB. Western Alliance and Zions Bancorp were also downgraded after downgrading Signature Bank.

“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,” Moody’s stated.

Moody’s criticized First Republic of its “high reliance on more confidence-sensitive uninsured deposit funding” “low level of capitalization” Comparing to its competitors, the institution was noted that it retained a significant amount of deposits higher than the FDIC’s insurance limits, which makes its funding profile more attractive. “more sensitive to rapid and large withdrawals from deposits.”

“They should be able to count on us after all these many years, to be honest with them and tell them the truth,” Charlie Chandler, CEO and Chairman of Intrust Bank Customers of the bank. “And continue to tell them that we’re a very well-capitalized strong bank that is very interested in their well-being and the well-being of their money. We’ve had a few people come in and ask questions. But it’s been a very small number.”

Moody’s announced that, despite efforts by the Federal Reserve to protect banks facing liquidity problems and the Treasury Department’s assurance that Signature and SVB depositors of more than $250,000 would not lose money, Moody’s said, “Banks with substantial unrealized securities losses and with non-retail and uninsured US depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings and capital.”

SVB was responsible for $16 billion in unrealized loss due to Treasury bonds that it had purchased, which were devalued by an increase in yields. SVB needed to sell those bonds in order to fulfill its obligations. CNBC described SVB as “a favorite of high-flying tech investors that couldn’t get financing at traditional institutions.”

Experts predict that banks will be forced to keep more capital because of SVB’s failure than to invest.

“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,” Moody’s stated. “US 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.”

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