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Moody's Downgrades U.S. Banking System to Negative

Moody's Investors Service downgraded its outlook on the entire U.S. banking system to negative from stable due to a rapidly deteriorating operating environment and key bank failures, despite regulators' efforts to shore up the industry.

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Moody's logo

Moody's Investors Service has downgraded its outlook on the entire U.S. banking system to negative from stable, citing a rapidly deteriorating operating environment. The move comes in light of several key bank failures and extraordinary actions regulators took to shore up the industry. The downgrade could impact credit ratings and borrowing costs for the sector.

Individual Institutions Downgraded or Reviewed for Downgrade

Moody's downgraded Signature Bank, removed all ratings and placed the following institutions under review for potential downgrades: First Republic, INTRUST Financial, UMB, Zions Bancorp, Western Alliance, and Comerica. The extended period of low rates combined with pandemic-related fiscal and monetary stimulus has complicated bank operations.

Persistent Pressures and Economic Recession Ahead

Moody's expects the U.S. economy to fall into recession later this year, further pressuring the industry. It anticipates ongoing monetary policy tightening and higher interest rates, which will reduce earnings at banks, particularly those with a greater proportion of fixed-rate assets. Banks with substantial unrealized securities losses and uninsured depositors may still be at risk for adverse effects on funding, liquidity, earnings, and capital.

Market Reacts Positively to Downgrade

Despite the downgrade, bank stocks rallied strongly. The SPDR Bank exchange-traded fund rose nearly 6.5% in morning trade, and major indexes were higher, with the Dow Jones Industrial Average up nearly 450 points, or 1.4%.