Moody’s downgrades regional banks, predicts 2024 recession.
Moody’s Downgrades Credit Ratings of Regional American Banks
On Tuesday, Moody’s Investors Service made a significant move by reducing the credit ratings of ten regional American banks. This decision has also put many other bigger banks at risk of being downgraded.
The Affected Banks
The ten banks targeted by Moody’s include Amarillo National Bancorp, BOK Financial, Commerce Bancshares, Fulton Financial, M&T Bank, Old National Bancorp, Pinnacle Financial Partners, Prosperity Bancshares, and Webster Financial. The repercussions of this action were immediately felt, as shares of major banks such as JPMorgan, Bank of America, Citigroup, and Wells Fargo plunged.
Further Review and Negative Outlook
Moody’s Investors Service has also announced that it will review the ratings of six other institutions, including Bank of New York Mellon, Northern Trust, State Street, and US Bancorp. Additionally, Moody’s has assigned a negative outlook to 11 other banks, as reported by The Wall Street Journal. The Dow Jones Industrial average experienced a significant drop of 3.75% in response to these developments.
Reasons Behind the Downgrades
Moody’s has justified its decision by pointing out the growing profitability pressures faced by many banks in their second-quarter results. These pressures are expected to reduce their ability to generate internal capital. Moody’s also predicts a mild U.S. recession on the horizon for early 2024, with potential risks in some banks’ commercial real estate portfolios. The tightening in monetary policy and an inverted yield curve have further impacted banks’ profitability and ability to generate capital internally, according to Moody’s analysts.
However, Ana Arsov, managing director of financial institutions at Moody’s, clarified that this move is not indicative of a broken banking system. She emphasized that it is primarily a profitability story and does not raise major concerns about the system being undercapitalized or underfunded.
Challenges Faced by Banks
The release of non-interest bearing deposits triggered by the 2023 financial situation has affected the net interest margins of banks. This refers to the difference between the interest banks earn on loans and the interest depositors earn. Investopedia noted that most banks are troubled by high loan-to-deposit ratios, which could leave them vulnerable to insufficient liquidity.
In May, the failure of First Republic Bank, the largest bank failure since Washington Mutual in 2008, marked a significant event in U.S. banking history.
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