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Moody’s Outlook On U.S. Banking System Turns To Negative, Citing A ‘Rapidly Deteriorating’ Environment

In a major hit to an already-shaky industry, Moody’s Investors Service cut its outlook for the banking sector as a whole from stable to negative. The company, which is part of the Big Three credit-rating services, said on Monday that it made the move because of the failures at the major banks, which prompted regulators on Sunday to intervene with a dramatic bailout plan for depositors and other institutions affected by the crisis. 

The action follows late-morning moves late Monday in which Moody’s warned that it was downgrading, or placing under review, the ratings for seven individual institutions. The moves are significant, as they can affect the credit ratings—and therefore borrowing costs—of a whole industry. In downgrading the sector as a whole, the ratings agency noted extraordinary actions taken to strengthen affected banks.

“We have changed to negative from stable our outlook on the US 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 said in a report.

But it said that other institutions, which had not realized losses or had not insured depositors, could still be in danger. The Fed has created a tool to make sure institutions facing liquidity problems can get cash. The Treasury supported the program with $25 billion in funds, and promised depositors who had over $250,000 at SVB and Signature would have complete access to their funds.

But Moody’s said there were still concerns. Bank shares have rallied sharply in spite of the downgrade. Moody’s on Monday cut Signature Bank’s ratings, saying it will pull all ratings. The company noted the prolonged low-rate environment, combined with fiscal and monetary stimulus related to the Covid pandemic, has complicated bank operations.

Silicon Valley Bank (SVB), for example, found that it had about $16 billion of unrealized losses on the longer-dated Treasury securities that it held. 

As yields rose, that depressed the principal value of those bonds, creating liquidity problems for a bank long favored by high-flying technology investors who cannot secure funding from mainstream institutions. 

“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,” the report said.

SVB had to sell these bonds at a loss in order to satisfy obligations. Rates were rising, while the Fed was fighting a run of inflation that had sent prices to the highest levels in more than 40 years.

Moody’s said it expected the Fed would keep raising rates. The company said it expects the US economy to enter recession later this year, which would put additional pressure on the sector.

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