As the third Trump indictment and the ongoing Hunter Biden situation seize headlines, one alarming economic revelation is slipping under the radar: Moody’s recent credit rating cuts to several banks, signaling potential turbulence in our near financial future.
On Monday, Moody’s downgraded the ratings of ten mid-sized U.S. banks. They left a clear warning for banking giants such as the Bank of New York Mellon, US Bancorp, State Street and Truist Financial. These major financial institutions are now under review for potential downgrades, underscoring the deep-seated problems within the banking industry.
What took them so long? These problems were obvious year ago, even before the #Fed started raising interest rates. Yet despite the late warning, the downgrades don't nearly go far enough. The problem is far greater than Moody's realizes.https://t.co/LazZQaLBQQ
— Peter Schiff (@PeterSchiff) August 8, 2023
Moody notes that the primary cause for concern is the looming U.S. recession predicted for early 2024. This recession will test the sector’s credit strength against funding risks and diminishing profitability. Additionally, there’s growing apprehension about certain banks’ commercial real estate (CRE) portfolios. With the decline in office demand due to the pandemic-induced remote work culture and less available CRE credit, elevated CRE exposures are becoming increasingly risky.
However, the CRE problem isn’t the only challenge. Higher funding costs, profitability pressures, and waning loan growth are emerging as shared themes in banks’ second-quarter earnings. The Fed’s recent rate hikes, designed to combat inflation, are expected to reduce consumer loan demand, further burdening the industry.
Quick recap from this year alone:
Gas prices are up 20% year-to-date.
Three of the largest bank failures in U.S. history.
Bank and government downgrades.
Annual interest payments are poised to hit $1 trillion.
Rolling 12-month deficit of $2.2 trillion.
— Liberty Nation (@libertynation) August 9, 2023
Furthermore, while many banks displayed impressive credit quality and capital ratios, the overall backdrop remains challenging, characterized by stiff competition in deposit attraction following the banking crisis earlier this year. Moody’s emphasized that several banks showed material increases in funding costs in their 2023 second-quarter earnings, primarily due to tightening monetary policies and the inverted yield curve.
On a more granular level, big banks have specific vulnerabilities. For instance, U.S. Bancorp and Truist Financial are grappling with low capital buffers that could render them fragile in the face of renewed crises. On the other hand, State Street and BNY Mellon have seen a significant outflow in non-interest-bearing deposits, increasing funding pressure.
Notably, regional banks are not entirely in the clear either. Despite the stabilization of deposit outflows, these banks are strategizing to streamline their balance sheets and minimize borrowing in the upcoming quarters. This could erode any surplus liquidity previously accumulated. And as interest rates ascend due to the Fed’s measures, banks will likely adopt a more conservative approach to managing their assets, potentially diminishing loan growth in future quarters.
On the stock market front, while shares of renowned lenders like Truist Financial, State Street, and U.S. Bancorp have made a comeback from the lows of spring, they’re yet to regain the year-to-date losses. The broader S&P 500 banking sector barely inches forward with just under a 1% gain this year.
Coming at a time when the Federal Reserve is implementing the most aggressive monetary policy tightening in decades, the Moody’s downgrades and the looming economic uncertainty signal that we may be on the precipice of another significant economic shift. With the benchmark rate at its highest since 2001 and ongoing reductions in banking system reserves, it’s clear: America should brace for impact.
As the narrative unfolds and economic analysts continue to weigh in, the general public must stay informed and prepare for potential financial challenges. And while our current political climate remains convoluted and contentious, it’s paramount that economic signals like these not be overshadowed or ignored.