Moody's credit rating agency downgrades banking sector outlook to 'negative'
President Biden's pep talk about the banking sector being "safe" does not appear to have calmed the financial markets after the implosion of Silicon Valley Bank.
One of the top credit rating agencies, Moody's Investors Service, downgraded its outlook for the entire banking sector amid signs that a global banking crisis could be underway.
Moody's cited "rapidly deteriorating conditions" following the collapse of Silicon Valley Bank and New York-based Signature Bank.
“We have changed to negative from stable our outlook on the US banking system to reflect the rapid deterioration in the operating environment following deposit runs at Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the failures of SVB and SNY,” Moody’s said in a report.
Troubling bank report
Fears of contagion spread Wednesday as Credit Suisse, a major investment bank in Switzerland, started plummeting.
Switzerland's central bank said they will bail out Credit Suisse if needed. The impact was felt on Wall Street, with shares falling in top banks like J.P. Morgan and Goldman Sachs.
The turmoil began a week ago, when SVB, a top lender to tech startups, collapsed after being forced to sell bonds at steep losses following the Federal Reserve's aggressive interest rate hikes.
Similarly situated banks could see trouble as the Fed continues to tighten in its effort to tame inflation, Moody's predicted.
"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," the agency added.
Crisis spreading?
Biden pledged to do "whatever is needed" and assured consumers that the "banking system is safe" in a speech Monday.
"Americans can rest assured that our banking system is safe. Your deposits are safe. Let me also assure you, we will not stop at this. We'll do whatever is needed," he said.
So far, Biden has moved to backstop mostly uninsured depositors at SVB and Signature Bank, leaving many to see an echo of the government bailout of banks deemed "too big to fail" during the 2008 financial crisis.
The Federal Reserve is also making $25 billion available for lending to provide troubled banks with liquidity if needed. Despite these extraordinary measures, stocks in regional banks like First Republic have oscillated up and down all week.
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