WASHINGTON, March 15 ― Moody’s Investors Service said yesterday that it has downgraded its outlook on the US banking system from stable to negative after the collapse of one of the 20 largest lenders in the United States that analysts say could create a contagion.
“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 seen by Sputnik yesterday.
SVB is the largest US lender to fail since Washington Mutual collapsed in 2008 at the height of that year's financial crisis. Investors at the California-based bank withheld US$42 billion (RM187.8 billion) in deposits last week, triggering a 60 per cent plunge in its share prices.
SVB provided financing for almost half of US venture-backed technology and healthcare companies. At the end of 2022, the bank said it had US$151.5 billion in uninsured deposits, US$137.6 billion of which was held by US depositors. Its total assets were US$209 billion as of the end of 2022.
The Federal Deposit Insurance Corporation (FDIC) took charge of SVB over the weekend. The FDIC also took control of Signature, which had US$110.36 billion in assets and US$88.59 billion in deposits at the end of last year, according to the New York Department of Financial Services.
Moody’s said although the US Treasury, Federal Reserve, and FDIC announced all depositors of SVB and Signature Bank will be made whole, “the rapid and substantial decline in bank depositor and investor confidence precipitating this action starkly highlight risks in US banks' asset-liability management (ALM) exacerbated by rapidly rising interest rates.”
Moody’s also noted that while the Fed’s new temporary liquidity facility for banks could reduce contagion risks from the SVB fallout, “banks with substantial unrealised 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.”
Banks with lower unrealised securities losses, stronger capitalisation, diverse sectoral exposures, and granular insured deposit bases will be more shielded or benefit from a flight to quality, the report said.
“Our base case is for the Fed's monetary tightening to continue, which could deepen some banks' challenges,” the report added.
The Fed added 450 basis points to interest rates in eight rate hikes over the past year, in a bid to control runaway inflation triggered by the trillions of dollars of relief spending forced by the coronavirus pandemic measures.
Since the outbreak of the SVB crisis, there have been growing calls on the Fed to do limited interest rate hikes or stop monetary tightening altogether until it is certain that the economy is sound and will not be tipped into a recession by the central bank’s actions.
The Fed’s next rate decision is on March 22, where it is widely expected to add another 25 basis points, bringing rates to a peak of 5 per cent. They stood at a high of just 0.25 per cent during the height of the Covid-19 crisis in March 2020. ― Bernama-Sputnik
