US Banks Facing ‘Significant Risk’ of Deposit Flight, Warns Moody’s
The credit ratings agency Moody’s has issued a warning on the US banking system, stating that 10 regional banks will have their ratings downgraded and several big lenders, including Bank of New York Mellon and US Bancorp, are being considered for a downgrade. Moody’s highlights the potential for further deposit flight, citing “eroding” profitability and continued rate hikes from the Federal Reserve as contributing factors. The agency also predicts a contraction in the US economy in the coming months, which could lead to increased lending losses for banks. Moody’s expects the Federal Reserve to maintain high interest rates until inflation reaches its target of 2%.
Key Points:
- Moody’s is downgrading the ratings of 10 regional banks.
- Big lenders, including Bank of New York Mellon and US Bancorp, are being considered for a downgrade.
- American banks are facing the prospect of further deposit flight.
- Profitability is being eroded by rate hikes from the Federal Reserve.
- The US economy is expected to contract in the coming months.
Moody’s warns that the US banking sector is at “significant risk” of deposit flight due to narrowing profit margins. The agency highlights the challenges that US banks face with interest rate management and the wind-down of unconventional monetary policy. While the drain on deposit funding moderated in the second quarter, there remains a risk that systemwide deposits will decline in the future. Additionally, Moody’s predicts a mild recession in early 2024 and expects asset quality to decline, particularly in commercial real estate portfolios. The agency suggests that US banks will face tightening credit conditions and rising loan losses as a result.
Hot Take:
The warning from Moody’s raises concerns about the stability of the US banking system. The potential for deposit flight and declining profitability could have significant implications for the overall health of the economy. It will be important for banks to carefully manage their interest rate and asset-liability risks to mitigate the impact of these challenges. Additionally, policymakers will need to consider measures to support banks and prevent a potential downturn in lending and economic activity.
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