The stock market took a significant hit this morning after Moody’s downgraded numerous small U.S. banks.
- Moody’s Analytics announced Tuesday that 10 smaller banks had their credit rating downgraded, while six additional larger banks are under review for potential downgrades.
- M&T Bank, BOK Financial, Webster Financial, and Pinnacle Financial are downgraded banks, while Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust face reviews.
- The stock market reacted violently to the news, with the Dow Jones briefly declining 400 points, while the S&P 500 (1%) and Nasdaq (1.2%), respectively, took sizable hits.
- Regional banks like U.S. Bancorp, Key, and Comerica saw valuation declines in the S&P 500.
- Moody’s cited reasons include deposit risk, recession fears, and struggling portfolios, with second-quarter earnings showing profitability pressures harming internal capital.
Why It’s Important
This year has been a difficult year for regional banks, and Moody’s is predicting that it could get worse. As it says, it predicts a mild recession in early 2024 amid tightening credit conditions and increasing loan losses. This is in addition to high-interest rates, high inflation, a tight real estate market, and tightening job markets.
“Higher interest rates continue to reduce the value of US banks’ fixed-rate securities and loans, and interest rate risk is not captured well in US bank regulation and thus can create liquidity risks,” Moody’s notes.
In just the past six months, the U.S. has experienced three of its largest historic bank collapses. In short order, Silicon Valley Bank, Signature Bank, and First Republic Bank collapsed and sparked massive bank runs on regional banks, forcing intervention from the federal government to prevent a system-wide collapse—destroying billions of dollars, destabilizing markets, and harming payroll and financing for thousands of startups and small businesses.
Americans’ faith in the banking system is already stressed, with large percentages of the country worried about the safety of their savings and moving their accounts to larger banks.
“It’s not optional to have good credit ratings because they need faith. Any sort of reduction of faith in the regional banking system is really terrible for market sentiment,” says Infrastructure Capital Advisors CEO Jay Hatfield.
Moody’s warns that banks are struggling to contend with present market conditions and that this creates risks for liquidity and capital, draining deposits and depressing the value of assets. With recession fears flaring and profitability tightening, it sees the market’s volatility harming credit.