Aug 09, 2023

The US stock market plunged on Tuesday after ratings agency Moody’s downgraded the credit ratings of a number of US banks and placed some large lenders on review.

SPX500-daily-chart

SPX500 – Daily Chart

The S&P 500 index started the day with a dip and traded at its weekly lows, but the index managed to recover and hold on to support. There is still potential for the S&P 500 to reach its July highs.

Moody’s, a ratings agency, reduced the credit ratings of several small and mid-sized US banks on Monday and placed some of the larger Wall Street names under review. The company downgraded the rating of ten banks by one notch, while Bank of New York Mellon, US Bancorp, and State Street were among the large lenders being evaluated.

According to Moody’s analysts Jill Cetina and Ana Arsov, US banks are still facing interest rate and asset-liability management (ALM) risks, which have implications for liquidity and capital. This is because the winding down of unconventional monetary policy is draining systemwide deposits, and higher interest rates are depressing the value of fixed-rate assets.

Many banks’ second-quarter results showed that profitability is under increasing pressure, which will reduce their ability to generate internal capital. This comes as a mild recession in the US is expected in early 2024, and asset quality is expected to decline from solid but unsustainable levels, with particular risks in some banks’ commercial real estate (CRE) portfolios.

This is the first major round of downgrades since the regional banking crisis in March following the collapse of Silicon Valley Bank.

The Federal Reserve raised its benchmark interest rate to a range of 5.25% to 5.5%, following a series of aggressive rate hikes over the previous year and a half.

Moody’s added that they expect banks’ asset-liability management (ALM) risks to be exacerbated by the Federal Reserve’s significant increase in its policy rate, as well as the ongoing reduction in banking system reserves at the Fed and, relatedly, deposits because of ongoing quantitative tightening (QT).

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