Moody’s Investors Service, one of the three prime rating services, downgraded its rating of the entire banking system from stable to negative in response to the SVB banking crisis.
Moody’s, which predicted a coming recession, had warned it would downgrade Comerica, First Republic, Intrust Financial, UMB, Western Alliance, and Zions Bancorp after downgrading Signature Bank.
“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 stated.
Moody’s criticized First Republic for its “high reliance on more confidence-sensitive uninsured deposit funding” and “low level of capitalization” compared to its competitors, and pointed out that the institution retained a substantial amount of deposits above the FDIC’s insurance limit, making its funding profile “more sensitive to rapid and large withdrawals from deposits.”
“They should be able to count on us after all these many years, to be honest with them and tell them the truth,” Charlie Chandler, Chairman and CEO of Intrust Bank, stated of the bank’s customers. “And continue to tell them that we’re a very well-capitalized strong bank that is very interested in their well-being and the well-being of their money. We’ve had a few people come in and ask questions. But it’s been a very small number.”
Despite the Federal Reserve’s efforts to protect banks with liquidity problems and the Treasury Department’s promise that depositors with more than $250,000 at SVB and Signature would not lose their money, Moody’s declared, “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.”
SVB was saddled with $16 billion in unrealized losses due to Treasury bonds it had bought that had been devalued by a rise in yields. In order to meet its obligations, SVB had to divest itself of those bonds. CNBC described SVB as “a favorite of high-flying tech investors that couldn’t get financing at traditional institutions.”
Because of SVB’s failure, experts predict banks will have to retain more capital rather than invest.
“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 stated. “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.”