Moody’s, the renowned credit rating agency, issued a warning that the US banking sector is still grappling with challenges, emphasizing the need for close scrutiny of fourth-quarter capital amid concerns over potential reflation. The cautionary statement comes in the wake of the recent collapse of Silicon Valley Bank (SVB), raising questions about the overall stability of the banking landscape.
Ana Arros, Managing Director at Moody’s, expressed her concern, stating that the US banking sector is not yet out of the crisis, primarily due to the looming risk of inflation resurgence, known as reflation. Arros highlighted the pivotal role of effective interest rate predictions by banks in navigating this risk and ensuring stability.
The US banking sector faced a turbulent period last fall, marked by the abrupt collapse of SVB. The bank incurred substantial losses attributed to the rapid surge in interest rates. Following this development, a wave of depositors withdrew funds from SVB, leading to its eventual closure. The fallout from SVB’s collapse adversely affected market confidence in both regional and mid-sized banks.
In response to the crisis, Moody’s took action, downgrading the credit ratings of ten medium-sized banks in early August. Additionally, the credit ratings of six major banks underwent review, signaling the potential for downgrades in the near future.
Ana Arros, speaking at the “Reuters Next” forum on Thursday (Nov 9), underscored that the outlook for the US banking sector remains negative. She emphasized that the risk of inflation resurgence is particularly high if banks fail to accurately predict the trajectory of interest rates and adjust their portfolios accordingly.
The focus of Moody’s attention now turns to the capital positions of US banks in the fourth quarter of this year and the first quarter of the next. The agency is closely monitoring these periods to assess how effectively banks are managing their capital in the face of ongoing economic uncertainties.
Silicon Valley Bank (SVB), which specialized in lending to the technology industry and startups, suffered a staggering loss of $1.8 billion from the sale of US government bond holdings. The value of SVB’s portfolio plummeted as the Federal Reserve (Fed) implemented interest rate hikes to curb inflation. SVB also grappled with cash flow challenges as startups withdrew their deposits from the bank.
The crisis has been attributed by analysts to the Fed’s swift and consecutive interest rate hikes, leading to increased borrowing costs for businesses, especially impacting startup ventures and technology companies that were significant clients of SVB.