Moody’s Puts Credit Ratings of Six Large US Banks Under Review for Possible Downgrade, Stocks Tumble
Moody’s, the credit ratings agency, has announced that it is putting the credit ratings of six large US banks under review for a possible downgrade. This news has caused stocks to tumble as investors worry about the potential for more pain in the banking sector.
The three banks specifically mentioned in Moody’s warning are Bank of New York Mellon, State Street, and Northern Trust. According to Moody’s, this warning reflects the “ongoing strain” in the US banking sector, including increased pressures on funding and potential weaknesses in the amount of capital banks are required to hold.
A potential downgrade in credit ratings could push funding costs for these banks even higher, causing further concerns for investors. In response to the news, US stocks saw a significant decline, with the Dow falling more than 400 points, or 1.2% lower. The S&P 500 and Nasdaq also experienced drops of 1% and 1.2% respectively.
Bank stocks, in particular, were heavily affected by the news. Wells Fargo saw a decrease of 2.7%, while JPMorgan Chase and Bank of America dropped 2.3% and 3.5% respectively.
This announcement comes after several significant occurrences in the US banking industry. The collapse of Silicon Valley Bank, Signature Bank, and First Republic earlier this year had already shaken the sector.
Moody’s also expressed concerns about the impact of interest rate hikes by the Federal Reserve. These hikes have negatively affected US banks, and Moody’s noted that “higher interest rates continue to reduce the value of US banks’ fixed-rate securities and loans.” The agency explained that interest rate risk is not well captured in US bank regulation, creating liquidity risks.
In addition to the three banks mentioned earlier, Moody’s is also closely monitoring Truist, Cullen Frost, and U.S. Bancorp. Similar reasons were cited for the action concerning these banks, with the additional mention of “rising risks associated with commercial real estate exposures.”
Widespread remote work since the pandemic has diminished the value of US offices, raising concerns about potential losses for banks that finance commercial real estate deals. Regional and community banks are considered particularly exposed to these loans.
Moody’s emphasized that most regional banks have comparatively low regulatory capital compared to larger US banks and global peers. The agency also highlighted that US banks’ second-quarter earnings showed “material increases” in funding costs and pressures on profitability due to sharp interest rate hikes.
Moody’s also downgraded 10 smaller US banks, including Commerce Bancshares, BOK Financial Corporation, and M&T Bank Corporation. Among the factors cited were the rising risk of declining asset values, especially for small and mid-sized banks with significant exposure to commercial real estate.
Overall, Moody’s warning about a possible downgrade in the credit ratings of these US banks has caused significant concern in the financial market. The ongoing strain in the banking sector and the potential impact on funding costs and profitability has led to a decline in stock prices. Investors will be closely monitoring the situation as developments unfold.