The financial landscape is undergoing a significant shift, as evidenced by Moody’s recent downgrade of credit ratings for ten small to midsized banks in the United States. This move comes in response to strains and growing finances that threaten the profitability and stability of these institutions. Moody’s also expressed concerns about the potential downgrades of some of the U.S. largest lenders, signaling a broader wave of instability that has caught the attention of investors and analysts alike.
The journey towards this downgrade began in March, when Silicon Valley Bank, which was once among the nation’s 16th largest banks, experienced a sudden collapse that sent shockwaves throughout the industry. As depositors grew anxious about the bank’s solvency, a classic bank run ensued, leading to the downfall of other institutions like Signature Bank and First Republic Bank. These events raised alarm bells about the overall stability in the banking sector, prompting widespread concerns among investors.
The consequences of Moody’s downgrades were immediately felt on Wall Street, as U.S. markets faced a significant downturn. Investors grappled with the implications of these downgrades and the negative outlooks for major U.S. banks. M&T Bank, which is among the institutions hit by the downgrade, saw its stock decline by 1.5% on Tuesday, with an additional 1.4% drop in late-morning trading on Wednesday. Similarly, Trust Financial, which Moody’s identified as under review for potential downgrades, experienced a decline of 1.8% on Wednesday.
Moody’s emphasized that the issues which triggered the banking crisis that came up earlier this year have remained the same. The risk of depositors withdrawing their funds still looms, compounded by the current high-interest rate environment that is devaluing investments made during periods of low rates. The agency also pointed out that asset risks are on the rise for mid-sized and small banks, particularly those with significant CRE (corporate real estate) holdings. Elevated Corporate Real Estate (CRE) exposures are particularly problematic due to factors like sustained and high-interest rates, declining office demand resulting from remote work, and reduced access to CRE credit.
Smaller banks find themselves especially vulnerable in this environment. Many of these institutions are facing substantial unrealized economic losses, eroding investor confidence. However, it’s worth noting that while individuals may be concerned about the security of their deposits, there are regulatory safeguards in place, such as FDIC insurance and regulatory intervention, as demonstrated during the collapse of Silicon Valley Bank.
The repercussions of these downgrades extended beyond the individual banks, causing a decline in the shares of banks across the U.S. Moody expressed concerns about the ability of U.S. banks to generate profits, citing high-interest rates, rising funding costs, and the specter of an impending recession. The agency also highlighted the exposure of certain lenders to commercial real estate as a point of concern. This situation was mirrored in European markets, with Italian banks facing significant declines due to a new tax on profits derived from higher interest rates.
The list of banks Moody’s downgraded is as follows:
1.Amarillo National Bank
2.Associated Bank
3.BOK Financial
4.Commerce Bank
5.Fulton Financial
6.M&T Bank
7.Old National Bank
8.Pinnacle Financial and
9.Prosperity Bank
10.Webster Financial
