US Banks See Massive Risk of Deposit Flight

Moody’s, a credit ratings agency, has issued a warning about the US banking system. According to their research note, they have lowered the ratings of 10 regional banks and are considering downgrading big lenders such as Bank of New York Mellon, US Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust.

Moody’s states that US banks might experience further deposit withdrawals because of decreasing profitability and continuous rate hikes from the Federal Reserve.

American banks still face interest rate and asset-liability management risks, which could impact liquidity and capital.

The end of unconventional monetary policy has resulted in a decrease in systemwide deposits, while higher interest rates have caused the value of fixed-rate assets to decline.

In the second quarter, the negative impact of quantitative tightening on deposit funding slowed down, but there’s still a risk that systemwide deposits may decrease in the future.

Although most banks had stable or slightly lower deposits, there was a decline in non-interest-bearing deposits and an increase in banks paying more for deposits, leading to reduced profitability and the ability to generate internal capital.

According to Moody’s analysts, the US economy may experience a mild recession in early 2024, which will add to the pressure on banks’ profitability. Additionally, asset quality may decline in some banks’ commercial real estate portfolios, creating further risks.

Moody’s predicts that the Federal Reserve will keep interest rates high until inflation reaches its target of 2%. If a recession occurs, US banks may experience significant lending losses.

“We continue to expect a mild recession in early 2024, and given the funding strains on the US banking sector, there will likely be a tightening of credit conditions and rising loan losses for US banks.”

Stay tuned for more news and make sure to check the markets as well.