Moody’s Warns of Potential Financial Disruption Spillover Beyond US Banking Sector

Roughly ten days ago, the credit agency Moody’s Investors Service downgraded the U.S. banking sector from “stable” to “negative.” In a recent update on Thursday, the company stated that there is still a risk to the U.S. economy. The managing director of credit strategy at Moody’s explained that the country “will be unable to curtail the current turmoil,” and it could spread “beyond the banking sector.”

In a note sent out on Thursday, Moody’s managing director of credit strategy Atsi Sheth explained that the U.S. may not be able to contain the banking turmoil that started two weeks ago. The commentary follows Moody’s recent downgrade of the U.S. banking industry, which was slashed from “stable” to “negative.” The credit agency applied the downgrade after three major U.S. banks collapsed, and the contagion spread to other U.S. banks and a few international financial institutions.

“The risk of the financial disruption spilling over could unleash greater financial and economic damage than we anticipated,” Moody’s analysts wrote. According to Moody’s, banks are not the only financial institutions that can be hurt by the Federal Reserve’s consistent rate hikes. “Market scrutiny will focus on those entities that are exposed to similar risks as the troubled banks,” Moody’s explains.

The credit agency added:

[U.S. officials] will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector.

The note from Moody’s credit analysts is similar to the warning Fitch Ratings gave last week, which explained that other types of non-bank-related institutions could feel the “knock-on effects” of the banking contagion. Last October, Fitch Ratings predicted a U.S. recession would happen in the spring of 2023. Moody’s analysts envision constrained growth this year.

“Over the course of 2023, as financial conditions remain tight and growth slows, a range of sectors and entities with existing credit challenges will face risks to their credit profiles,” Moody’s analysts led by Sheth concluded on Thursday.

What do you think should be done to mitigate the risks of the potential spillover effects of the U.S. banking sector’s turmoil on other financial institutions? Share your thoughts in the comments section below.