Moody’s warns of more pain for US banks as downgrades sector

Ratings giant Moody’s has warned of more pain ahead for the US banking system after a run on deposits led to the collapse of Silicon Valley Bank.

Moody’s cut the outlook for the sector to “negative” from stable, warning of “a rapid deterioration in the operating environment”.

The downgrade came as banking stocks in the US and Europe rebounded from earlier losses.

But Moody’s said some other banks faced the risk of customer withdrawals.

It said rising interest rates also pose a challenge, exposing banks that bought assets such as government bonds when interest rates were low to potential losses.

“Banks with significant unrealized securities losses and with non-retail and uninsured US depositors may remain more sensitive to depositor competition or ultimate flight,” Moody’s said in the report.

“We expect pressures to persist and be reinforced by ongoing monetary policy tightening, with interest rates likely to remain higher for longer until inflation returns to the Fed’s target range.”

Authorities have moved quickly to try to contain the fallout from the shock collapse of Silicon Valley Bank (SVB), the 16th largest in the US.

The firm, a key lender to technology firms, failed last week after a rush of customer withdrawals, triggered by the bank’s revelation that it needed to raise money and had been forced to sell a portfolio of assets, mainly government bonds, at a loss.

US regulators took over the bank and said it would guarantee deposits beyond the $250,000 level normally insured by the government. They took similar steps at smaller Signature Bank.

Officials from the Department of Justice and the Securities and Exchange Commission are now investigating the collapse, US media reported.

Reports have suggested that some customers of smaller US banks have tried to put their money in larger institutions.

Analysts expect turmoil in the financial system triggered by the failure to get the Fed to slow or stop rate hikes when it meets next week.

That view gained traction on Tuesday after the latest inflation report showed US prices rose 6% in the 12 months to February, in line with expectations, helping to lift stocks.

In early trading on Tuesday, San Francisco-based First Republic Bank – which had seen its share price soar 62% on Monday – jumped more than 50%, one of a number of firms whose shares were recovering. It eventually closed about 30% higher.

The three major stock indexes also climbed, with the Dow up 1%, the S&P 500 climbing 1.7% and the Nasdaq ending the day more than 2% higher.

In the UK, bank shares – which saw sharp falls on Monday – were mostly higher on Tuesday afternoon. The FTSE 100 ended up about 1.2%.

The European Stoxx banking index also opened lower on Tuesday, but then rallied to finish almost 3% higher.

But shares in HSBC, which rescued SVB’s UK business for £1, closed down 1% and there were big overnight losses in Japan, where major lenders such as the country’s biggest bank MUFG saw their share prices fall by more than 8%.

An index of Japanese bank shares, known as the Topix Banks Index, plunged 7.4%, despite assurances from the Bank of Japan (BoJ).

“Japanese financial institutions’ direct exposure to Silicon Valley Bank is small, so the impact is likely to be limited,” a BoJ official said.