U.S. Banking System's Future Dealt Harsh Blow

Moody's Investors Service dealt a blow to the entire U.S. banking system less than a week after the Silicon Valley Bank (SVB) collapse sent shockwaves across the financial sector.

On Tuesday, the rating's agency changed its outlook on the system from stable to negative, writing that "operation conditions have sharply deteriorated" in the wake of the bank runs at SVB, Signature Bank and Silvergate Bank. Moody's is one of three major rating services.

Both SVB and Signature were abruptly shuttered on Friday and Sunday, respectively, by regulators. While SVB was pushed to close due to a bank run from tech clients concerned about the bank's potential losses, Signature was shut down out of fears that keeping it open would pose a risk to the entire banking system.

Those collapses have been a troubling sign for other small and midsize banks, including Silvergate, First Republic Bank and Western Alliance Bancorp.

SVB Collapse Banking System
People line up outside of the shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California. Justin Sullivan/Getty Images

The latest rating changes underscore the contagion that is likely to come from the fallout of SVB, despite efforts from both the Federal Reserve and the Treasury Department to stop its collapse from bleeding out into the rest of the banking system.

On Monday, Moody's downgraded Signature deep into junk territory and placed another six—First Republic, Western Alliance, Zions, Comerica, UMB Financial and Intrust Financial—for review, citing "extremely volatile funding conditions for some U.S. banks exposed to the risk of uninsured deposit outflows."

"Banks are generally well capitalized to face the deteriorating operating environment, but unrealized securities losses are a headwind," Moody's said on Tuesday. "Profitability will decline for many banks."

The agency said while the Fed's new bank funding facility is "constructive" and offers "incremental benefit" to creditors, "funding and liquidity conditions have sharply deteriorated for some banks." On Sunday, the Fed announced it would make additional funding available to eligible financial institutions to "help assure banks have the ability to meet the needs of all their depositors."

The firm is anticipating the U.S. economy to fall into recession later this year.

"We expect pressures to persist and be exacerbated by ongoing monetary policy tightening, with interest rates likely to remain higher for longer until inflation returns to within the Fed's target range," Moody's said.

"U.S. banks also now are facing sharply rising deposit costs after years of low funding costs, which will reduce earnings at banks, particularly those with a greater proportion of fixed-rate assets."

Update 3/14/23, 12:21 p.m. ET: This story was updated with additional information.