Moody’s has downgraded the US banking sector’s outlook to “negative”, citing “a rapid deterioration in the operating environment” following the collapse of Silicon Valley Bank due to a run on deposits.
While banking shares in the US and Europe have rebounded, Moody’s warns that some banks still face risks of customer withdrawals, and rising interest rates could expose banks to potential losses.
Banks with substantial unrealized securities losses and uninsured US depositors are expected to face greater pressure, which will be exacerbated by ongoing monetary policy tightening.
After the collapse of Silicon Valley Bank (SVB), the 16th largest bank in the US, due to customer withdrawals and the forced selling of assets at a loss, regulators took action to contain the fallout.
The bank was a major lender to tech companies. US authorities took over the bank and promised to guarantee deposits beyond the typical $250,000 level.
The government also intervened in smaller Signature Bank. The Department of Justice and the Securities and Exchange Commission are reportedly investigating the collapse.
On Tuesday, as trading began, San Francisco-based First Republic Bank, which saw a 62% drop in its share price on Monday, saw a significant increase of over 50%, as did other firms experiencing a recovery, with the bank ultimately closing roughly 30% higher.
The Dow, S&P 500, and Nasdaq indexes also climbed, with the Nasdaq ending the day over 2% higher, and the FTSE 100 in the UK closing approximately 1.2% higher.
Although there were steep losses overnight in Japan, with major lenders seeing their share prices tumble by over 8%, a Bank of Japan official stated that Japanese financial institutions’ direct exposure to Silicon Valley Bank is small, limiting the impact.