Credit ratings agency Moody’s Investors Service downgraded its outlook for the U.S. banking system on Tuesday after the rapid declines and collapses of Silicon Valley Bank, Signature Bank, and Silvergate Bank in recent days.
“Pandemic-related fiscal stimulus, along with more than a decade of ultra-low interest rates and quantitative easing, resulted in significant excess deposit creation in the U.S. banking sector,” the Moody’s note continues to say. “This has given rise to asset-liability management challenges, with some banks having invested excess deposits in longer-dated fixed-income securities that have lost value during the rapid rise in U.S. interest rates.”
Bank runs at Silicon Valley Bank, Silvergate, and Signature led to a crisis of confidence, both from investors and depositors, the ratings agency said. Lenders that had “substantial” unrealized securities losses and uninsured deposits may be hurt more as customers look for safer alternatives to park their funds, it added.
Moody’s wrote it expects more banks will be pressured after SVB’s failure, namely those with large amounts of deposits that aren’t insured by the Federal Deposit Insurance Corporation (FDIC). Reports indicated that upwards of 90 percent of deposits at SVB were uninsured as the bank was heavily used by tech companies and startups.
“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 said, according to reports.
The FDIC transferred all deposits of Silicon Valley Bank to a newly created bridge bank and all depositors will have access to their money beginning Monday morning, the financial regulator said. In a statement, the FDIC said all customers of SVB would automatically become customers of the bridge bank, which will hold “normal banking hours and activities, including online banking.”
The regulator has also tapped former Fannie Mae head Tim Mayopoulos as the chief executive officer of the newly created entity, named Silicon Valley Bank N.A., it said. “All depositors of the institution will be made whole,” the FDIC said, adding that no bank losses would fall on U.S. taxpayers. “These actions will protect depositors and preserve the value of the assets and operations of Silicon Valley Bank, which may improve recoveries for creditors and the DIF [deposit insurance fund],” it added.
Also Monday, Moody’s downgraded Signature Bank and said it would remove all ratings. First Republic, INTRUST Financial, UMB, Zions Bancorp, Western Alliance, and Comerica were placed under review for future downgrades.
Moody’s said Tuesday the Federal Reserve’s recent actions to raise interest rates will create more problems that banks face. Liquidity and funding will be harder to access, it noted, saying that when rates were low, financial institutions had an easier time.
Moody’s also said it was expecting the Federal Reserve to continue tightening monetary policy, in contrast to some others who are expecting the bank collapses this month to reshape the trajectory for interest rate hikes.
“Our base case is for the Fed’s monetary tightening to continue, which could deepen some banks’ challenges. Further drivers of the outlook are detailed in the overview table and bullets that follow,” the strategists said, it was reported.
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