Moody's downgrades its outlook for the US banking system after the collapse of SVB and Signature Bank

Places the ratings of half a dozen US banks, including First Republic, on negative watch

MADRID, 14 Mar. (EUROPA PRESS) -

The credit rating agency Moody's has worsened its outlook on the US banking system, down to "negative" from "stable", to reflect the rapid deterioration in the operating environment after the collapse of entities such as Silicon Valley Bank (SVB) , Silvergate Bank and Signature Bank (SNY).

The risk rating agency considers that, although the Department of the Treasury, the Federal Reserve and the FDIC have offered support to the clients of the entities, the rapid and substantial decrease in the confidence of bank depositors and investors that this action precipitated clearly highlights the risks in US banks' asset and liability management, exacerbated by rapidly rising interest rates.

Thus, while the Fed's new Bank Term Funding Program (BTFP) is constructive, Moody's expects pressures to persist and be exacerbated by ongoing monetary policy tightening, as well as rising deposit costs, which will reduce the profits of banks, particularly those with a higher proportion of fixed-rate assets.

"Our base case is that the Fed's monetary tightening continues, which could deepen the challenges for some banks," the agency has indicated, for which those banks with lower latent losses, greater capitalization, diverse sectoral exposures and deposit bases granular policyholders will be more protected or will benefit from a "flight to quality".

Furthermore, Moody's anticipates that the US will enter a mild recession in the latter part of 2023, and that real GDP growth will remain below trend in 2024, with a gradual increase in the unemployment rate, which will allow for inflation to subside, allowing the Fed to move to a neutral policy stance in 2025.

Likewise, the Moody's agency has placed all the long-term ratings of First Republic Bank and five other small US entities (Comerica, Zions, UMB Financial, Intrust and Western Alliance) on review for downside.

This downgrade revision reflects the extremely volatile funding conditions being experienced by some US banks exposed to the risk of uninsured deposit outflows.

In the case of First Republic, the risk rating agency indicates that if it were to face deposit outflows greater than anticipated and liquidity support were insufficient, the bank could need to sell assets, thus crystallizing latent losses in its values, which could materially weigh on the bank's profitability and capital.