The credit rating agency Moody’s Investors Service reduced its outlook for the US banking system from stable to negative, after the financial crisis of Silvergate Capital Corp.(SCC), Silicon Valley Bank (SVB) and Signature Bank (SB)in a day characterized by the massive transfer of deposits from small entities to large banks.
Despite the fact that federal regulators “announced that all SVB and SB depositors will recover, the rapid and substantial decline in bank depositor and investor confidence that this action precipitated clearly highlights the risks in asset and liability management.” of US banks, exacerbated by rapidly rising interest rates,” Moody’s said in a report.
The Treasury Department, the Federal Reserve (FED) and the Federal Deposit Insurance Corporation (FDIC) took extraordinary steps on Sunday to shore up confidence in the financial system after the SVB collapse, introducing new support for banks large enough to protect the nation’s deposits.
The announcement came alongside the closure of Signature Bank of New York by state banking regulators, along with growing concerns about spillover effects to other regional lenders and the broader economy.
Moody’s detailed that “the Fed has announced a new temporary liquidity facility to offer loans to banks collateralized by eligible government securities to help meet their financing needs and reduce contagion risks.”.
The agency then added that “banks, with substantial unrealized value losses and non-retail, uninsured US depositors, may be even more sensitive to depositor competition or eventual flight, with adverse effects on funding, liquidity, profits and capital”.
Moody’s placed six financial institutions on review for downgrades, including First Republic Bank, Western Alliance Bancorp, Intrust Financial Corp., UMB Financial Corp., Zions Bancorp and Comerica Inc.
In the midst of so many news, the market began to observe a massive withdrawal of funds from small and medium regional entities to the large banks of the system such as JPMorgan, Bank of America and Goldman Sachs.
Meanwhile, federal authorities have begun to probe whether there is interest in buying the SB from a major entity.
The FDIC has opened a call for potential bidders to begin transfer paperwork for the SB that was shut down after regulators withdrew support for management and depositors fled, according to officials with the New York Department of Financial Services, which put the bank in bankrupt.
All of SB’s deposits and substantially all of the firm’s assets went to Signature Bridge Bank NA, a full-service lender to be operated by the FDIC, as it searches for potential buyers.
The origin of the collapse
The banking crisis broke out at a time when the United States economy is facing a high rate of inflation and complicates the Fed’s plans to lower it to a horizon of 2% per year.
The consumer price index for February rose 0.4% to an annualized rate of 6%, a substantially high figure.
For analysts, these figures put the Fed in an uncomfortable position since it will have to justify a continued aggressive stance or else it will have to live with high inflation if it wants to moderate the rate of adjustment.
Meanwhile, shares in New York rallied as traders bet the worst of the banking crisis was over.
The S&P 500 recouped much of its lost gains late in the afternoon, despite comments from ratings companies on the financial sector underscoring fragile market sentiment towards banks.
The rally extended beyond financials, with all 11 sectors of the S&P 500 rising.
Stocks gave back some gains in the afternoon when investors received news that a Russian fighter jet shot down an American drone over the Black Sea.
The Dow Jones gained 1.1%, while the S&P 500 rose 1.7% and the Nasdaq technology indicator rose 2.1%, according to data provided by the New York Stock Exchange (NYSE).
