Moody's downgraded 11 regional banks
Photo: Reuters
For just over a month there has been global concern about the stability of the financial system following the collapse of two US regional banks, Silicon Valley Bank (SVB) and Signature Bank. Now US banks are scrambling to put those painful episodes behind them, but it's far from clear whether the situation has stabilized or it's just the calm before the storm. Tomorrow the conclusion of the Federal Reserve is expected on the reasons that led to the collapse of SVB.
As a related report by CNN points out, if we look at the levels of bank deposits, at first glance it may be convincing that now the banks are in a better situation than before. However, according to Ana Arsov, general director of Moody's, the picture is rather misleading and the banking crisis is not over yet. As she emphasizes, last week Moody's Investors Service made an unusual move, when it simultaneously downgraded 11 regional banks. Among them are First Republic Bank, US Bancorp, Western Alliance and Zions Bancorp. The main reasons cited were problems with their asset-liability ratio, their exposure to the hard-hit real estate sector and their declining capital adequacy. And the problem is that, in order to strengthen their capital position, these banks have to pay higher interest rates to attract deposits.
This implies that they will have a limit on the amount of capital they can raise as this will erode their profitability. According to Ana Arsov, “this does not mean that they will face deposit outflows similar to those we saw in the case of Sillicon Valley, but that banks remain more vulnerable to shocks”.
Following the collapse of SVB and Signature Bank, the major US banks, Bank of America JPMorgan Chase and Citibank, saw record inflows from regional and mid-sized banks. Their origin is clear since during the first quarter the deposits of the also regional bank First Republic Bank decreased by 41%, to 104.5 billion dollars. The mobility of deposits remains, however, stable from the end of March onwards , as its managing director, Michael Roeffler, points out.
According to Federal Reserve data, the same is true for all American banks, both large and small. As of April 21, First Republic's total deposits stood at $102.7 billion, including the $30 billion it had received from major US banks. This is 1.7% less than at the end of March, although according to Michael Roeffler, this slight decrease reflects “seasonal tax payments on the part of the bank's customers”. The shift to tighter monetary policy, launched a year ago by the Federal Reserve to curb inflation, has partly precipitated the banking crisis. And this is because the Federal Reserve raises interest rates by selling securities and specifically US government bonds. This way, however, the price of bonds falls and their yields increase.
SVB began to come under great pressure because much of its client funds were placed in bonds. The situation started to become problematic when its depositors, mainly start-ups and technology companies, started withdrawing funds as there were no other sources of funding. In order to meet their demands for large withdrawals, SVB was forced to sell bonds, but at prices that entailed a loss of almost $2 billion.
According to Christopher Wolff, head of North American banking at Fitch Ratings, SVB's case was rather extreme. Its customer base was undiversified, most deposits were uninsured, and the bank had invested almost everything in long-term US Treasuries. As Christopher Wolf points out, the result was that it was clearly more vulnerable to interest rate hikes than other banks. Many banks and their depositors heaved a sigh of relief when the US government announced that it would guarantee all deposits, including those above the US deposit insurance limit of $250,000.
It was, therefore, somewhat limited. the panic caused by the collapse of SVB. But many banks are still trying to recover the deposits they lost after the SVB collapse, as well as those many Americans have withdrawn and are still withdrawing to cope with the rising cost of living. And as Christopher Wolf points out, the expected new rate hikes from the Fed will likely trigger further massive withdrawals.
