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Aug. 8 (UPI) — The recent downgrade in ratings for several U.S. banks can be attributed to a drain on deposits and the decline in asset value in a high-interest rate environment, according to a report by Moody’s.
Moody’s Investors Service downgraded the credit rating for smaller lenders like Pinnacle Financial and put major banks such as Northern Trust under review.
In a report published late Monday, Moody’s highlighted the potential liquidity and capital crisis facing banks as unconventional monetary policy winds down, leading to a reduction in system-wide deposits and a decrease in the value of fixed-rate assets due to higher interest rates.
The second quarter results for many banks revealed struggles in generating profits, coinciding with Moody’s prediction of a “mild” recession in the U.S. economy by early 2024.
Moody’s also emphasized the risks associated with commercial real estate portfolios for some of the banks under review.
Concerns about China’s economic performance, coupled with the banking sector’s downgrade, resulted in a downturn on Wall Street. All major U.S. stock indices experienced losses during the Tuesday session, with the S&P 500 down 1% as of 11:30 a.m. EDT.
Shares in Northern Trust, one of the banks highlighted by Moody’s, experienced a decrease of approximately 3%, trading at $78.36 per share.
“All the headlines just turned bearish,” commented Ed Moya, a senior market analyst for OANDA.
This recent development raises concerns reminiscent of the early-year banking crisis triggered by the collapse of Silicon Valley Bank, Silvergate, and others. Over-reliance on volatile and untested cryptocurrencies likely contributed to Silvergate’s downfall, while SVB succumbed to a contagion of fear.
Gregory Becker, the former CEO of SVB, testified before congressional leaders earlier this year, explaining how rumors about the banking sector’s health spread rapidly online, leading to a run on deposits and ultimately the bank’s collapse.
The news from Moody’s follows Fitch’s recent decision to downgrade the United States’ rating from AAA to AA+ due to concerns over the political battle surrounding the nation’s debt ceiling.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” stated Fitch, pointing to the expected fiscal deterioration over the next three years.
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