The credit ratings of ten regional banks have been downgraded by risk rating agency Moody’s, which warned it was considering downgrading another six.
Major lenders Bank of New York Mellon, US Bancorp, State Street and Truist Financial, Cullen/Frost Bankers and Northern Trust are now under review, and the agency also assigns a negative outlook to 11 other banks, including major institutions Capital One and Citizens Finance .
Bank shares fell this morning after the announcement, which reignited fears for the health of the US banking sector amid rising interest rates and recent failures.
US medium-sized banks came into the spotlight earlier this year following the collapse of Silicon Valley Bank – the second largest bank failure in US history – and Signature Bank sparked an industry-wide run on deposits.
A sell-off in regional bank stocks put financial stocks at the bottom of the S&P 500 index, which also fell about 0.9 percent, while the Dow Jones index also fell more than 250 points, or about 0.8 percent.
Moody’s has downgraded the credit ratings of 10 regional banks in the US and announced it is considering a possible downgrade of six larger banks
A sell-off in regional bank stocks put financial stocks at the bottom of the S&P 500 index, which also fell about 0.9 percent
Shares in major US banks such as Bank of America, JPMorgan Chase and Citigroup also fell – despite not being rated by Moody’s.
Shares of M&T Bank, Pinnacle Financial Partners and Commerce Bancshares, which were among the banks cut a single notch by Moody’s, all fell two or more percent in morning trading.
Despite the move, however, Moody’s said there is no need to panic.
“What we’re doing here is acknowledging some headwinds — we’re not saying the banking system is broken,” said Ana Arsov, general manager of financial institutions at Moody’s. Reuters.
Announcing the downgrade of 10 banks, Moody’s said the Federal Reserve’s aggressive moves to raise interest rates to fight inflation “continue to have a material impact on the funding and economic capital of the US banking system.”
It warned that higher interest rates have continued to drive down the value of assets owned by medium-sized regional banks, exposing them to falls in share prices if investors become frightened.
Deposits, which have been a pressure point for banks since the collapse of Silicon Valley Bank earlier this year, are also expected to decline further as high interest rates lead customers to look elsewhere for higher yield options.
“While overall pressures on deposit funding due to quantitative tightening eased in the second quarter, there remains significant risk that system-wide deposits will resume their decline in the coming quarters,” Moody’s said.
However, some analysts remained positive and urged customers to remain calm.
“Our view of the broader sector remains constructive,” said Georgios Leontaris of HSBC Global Private Banking and Wealth. Reuters. “In recent weeks, we have adjusted our view of US banks to neutral positive.”
Moody’s move comes after rating agency Fitch downgraded the US government’s credit rating earlier this month, dropping it down a notch from the highest rating of AAA to AA+.
Rating agency Fitch downgraded the US government’s credit rating on August 1, taking it down a notch from the highest rating of AAA to AA+
The surprise move came just two months after the agency warned its rating was in jeopardy as lawmakers scrambled to raise the country’s debt limit — before avoiding what would have been a first-ever default.
In a statement, the rating agency said: “According to Fitch, there has been a steady deterioration in governance standards over the past 20 years.” It justified the downgrade by arguing that the country’s finances are likely to decline due to growing debt and political turmoil.
Following the news, Treasury Secretary Janet Yellen pushed back, calling the downgrade “arbitrary” and “obsolete.”
As Wall Street opened lower following the August 2 news — with the Dow Jones index down more than 100 points — experts urged calm, saying the long-term impact is likely to be mild.