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As if the U.S. banking industry wasn't having a rough enough week, Moody's Investors Service downgraded its view of the entire banking system from stable to negative.
The firm, which is one of the big 3 rating services, announced Monday that it was making the change in light of notable banking failures that left regulators no choice but to step in Sunday with an extreme rescue plan for depositors and other financial institutions impacted by the banking crisis.
"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 announced in a report.
The decision came late Monday after Moody's had warned that it was either going to downgrade or place on review for downgrade the status of 7 individual financial institutions.
The moves are significant as they could impact credit ratings and, therefore, borrowing costs for the sector.
Moody's noted in its downgrade for the entire sector that extraordinary actions were being taken to reinforce the impacted banks. However, it also noted that other institutions with uninsured depositors or currently unrealized losses could still be at risk.
The Treasury earmarked $25 billion to backstop a facility established by the Federal Reserve to ensure that banks facing liquidity problems would still have access to cash. Meanwhile, the Treasury has also vowed that depositors with more than $250,000 at SVB and Signature Bank would have full access to their funds.
Despite the drastic actions of the Fed and the Treasury, Moody's has said that there are still concerns.
"Banks with substantial unrealized securities losses and with non-retail and uninsured U.S. depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings, and capital," Moody's report said.
Despite the downgrade, bank stocks rallied strongly, with the SPDR Bank exchange-traded fund rising almost 6.5 percent in morning trade. Major indexes also saw an increase, with the Dow Jones Industrial Average jumping nearly 450 points or 1.4 percent.
Monday also saw Moody's downgrade Signature Bank with the firm announcing that it would remove all ratings. It also placed Intrust Financial, UMB, First Republic, Western Alliance, Comerica, and Zions Bancorp under review for possible downgrades.
According to the rating services agency, an extended period of low rates in conjunction with Covid-pandemic-related fiscal and monetary stimulus has complicated U.S. banking operations.
SVB ended up with some $16 billion in unrealized losses from long-dated Treasurys it held. The value of those bonds eroded as yields rose, which caused liquidity issues for the bank, which had long been a favorite of tech investors that struggled to get financing at traditional banks. To meet its obligations, SVB had to sell those bonds at a loss.
Rates also rose as the Federal Reserve faced the highest inflation rates the U.S. has seen in 40 years. Moody's anticipates that the Fed will continue to hike rates.
"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 said. "U.S. 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."
Moody's also noted that it expects the U.S. economy to fall into recession in the coming months, which will add additional pressure to the already struggling industry.
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