Traditional banks. Photo: Unsplash
Moody’s Investors Service downgraded the entire US banking sector following the events of last week. The note went from stable to negative.
The outlook downgrade follows recent bankruptcy events involving SVB, Signature Bank and Silvergate.
Although these banks above had cash on hand, most of the deposit funds were invested in government bonds or long-term mortgage-backed securities. In general, bonds have an inverse relationship with interest rates, which means that when rates rise, bond prices fall. This generated a lack of liquidity (money), resulting in bank failures.
Moody’s saw some trends in the sector and warned:
- The drop in depositor and investor confidence grew rapidly, which precipitated Moody’s action.
- But the company also warns that asset and liability management risk will remain high during the current monetary policy tightening.
“The very sharp increase in the federal interest rate and the withdrawal of unconventional monetary policy are combining to reduce bank deposits and weaken bank liquidity, exacerbating the challenges for some US banks in weathering this cycle. Some US banks also demonstrated weak governance and oversight of asset and liability management risk..” – stated the company.