Moody’s Investors Service, a prominent global credit rating agency, has shifted its outlook on the banking system from stable to negative. The agency made the announcement on Monday, citing recent bank failures as the reason for the change. Moody’s rates the creditworthiness of borrowers, including corporations and governments, and provides insights into the likelihood of default or risk associated with the repayment of debt.
According to Moody’s report, the failures of Silicon Valley Bank, Signature Bank, and Silvergate Bank, with assets totaling nearly $325 billion, have caused turmoil in the financial system. The rapidity with which the institutions failed is particularly concerning. Moody’s also warned that banks with substantial unrealized securities losses and non-retail, uninsured US depositors may be more sensitive to depositor competition or flight, which could have adverse effects on funding, liquidity, earnings, and capital.
“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.
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— Daily Caller (@DailyCaller) March 13, 2023
“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 suggests that the recent bank failures and the revision of the outlook from stable to negative could signal potential future problems in the banking system. Investors and financial professionals may need to exercise caution and conduct due diligence when investing in or lending to banks, especially those with high unrealized securities losses and uninsured deposits.
“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. “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.”
“The failures of Silicon Valley Bank, Signature Bank and Silvergate Bank, with assets collectively of close to $325 billion, have roiled the financial system. Particularly disconcerting is the speed at which the institutions failed. Once depositors lost faith in the viability of these institutions and began withdrawing funds, the banks quickly unraveled. Bank runs are rare, but they happen at a dizzying pace when they do occur.”
Moody’s has a reputation for being a reliable credit rating agency and has been providing credit ratings and financial research services for more than a century. Moody’s ratings are widely used by investors, businesses, and governments as a measure of creditworthiness and risk.
However, like any other credit rating agency, Moody’s has been subject to criticism and scrutiny in the past. Some have accused Moody’s of being too lenient in its ratings of certain securities before the 2008 financial crisis, which led to losses for investors. Moody’s has also faced criticism for conflicts of interest related to its business relationships with the firms it rates.
Breaking: Moody's downgrades the entire U.S. banking sector to a negative outlook, according to CNBC. pic.twitter.com/rfBAJvMdVK
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Despite these criticisms, Moody’s remains one of the leading credit rating agencies and is widely recognized for its expertise in assessing credit risk across various industries and sectors. Investors and businesses rely on Moody’s ratings to make informed investment decisions, and the agency’s outlook reports, such as the recent one on the banking system, are closely watched for insights into future trends and risks.
“These failures were especially surprising on the heels of a lengthy period of calm in the banking system. There were no bank failures last year or the year before. The system has been enjoying solid loan growth, extraordinarily few credit problems, and healthy profitability. These are not the conditions that historically have been the fodder for problems in the system.”