Key Insights
- Moody’s downgraded the credit ratings of 10 small and medium-sized banks in the US at once.
- The ratings of several larger banks are now being reviewed for possible downgrades.
- The main US stock indices began to decline against this background.
Rating agency Moody’s downgraded the credit ratings of 10 US small and medium-sized banks at once, Reuters reported.
In addition, the agency has placed the ratings of several larger banks, including Bank of New York Mellon, US Bancorp and State Street, on review for a possible downgrade.
For 11 significant banks, the rating outlook has changed to “negative”, including Capital One, Citizen Financial and Fifth Third Bancorp.
Risks to the sector’s sustainability come from funding issues and declining profitability, Moody’s noted.
The results of the second quarter of many banks showed growing pressure on profitability, which will reduce their ability to generate domestic capital, Reuters quoted a note from the agency.
Asset quality could decline in light of an expected mild recession in early 2024, especially the quality of several banks’ commercial real estate portfolios, Moody’s said.
Read also: US Credit Rating Downgraded for the First Time in 12 Years: What will this lead to?
Wall St falls as Moody’s bank downgrades spark broad sell-off
Major US stock indexes decline on August 8. As of 10:15 pm, the S&P 500 index (which includes the largest US companies by capitalization) was losing 0.53%, the Dow Jones index was also about 0.5%, and the Nasdaq technology index was over 0.9%.
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Shares of not only American banks, but also European ones are getting cheaper: due to investors’ fears about the health of the market, and also because of Italy’s decision to levy a 40% tax on excess profits of local banks, Reuters noted.
Italy’s banks lost a total of €10bn in market capitalization following the government’s decision to impose a lump sum on interest rate windfalls.
In the US, in the spring, financial regulators closed three large banks at once: California’s Silicon Valley Bank and New York’s Signature Bank in March, as well as First Republic Bank in May.
The collapse of Silicon Valley Bank was the result of a “textbook example of failed management” and insufficient oversight from the regulator, which exacerbated the hype in social networks, the US Federal Reserve (Fed) concluded.
In her opinion, the bank’s management was unable to cope with the increase in the base rate and the risks associated with liquidity, and the board of directors did not ensure proper control over the management and did not hold it accountable.
Shares of First Republic collapsed before its closureby about 75% in a week – after the bank reported on the outflow of deposits in the amount of more than $100 billion.
The difficult situation in the banking sector and the pressure on the income of some regional US banks could lead to some consolidation in the sector, and the authorities are very likely to approve such mergers, US Treasury Secretary Janet Yellen said in May.