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  • Writer's pictureHank Klint

Credit Ratings of Major US Banks Under Review, Leading to Stock Decline

Moody's decision to review the credit ratings of six prominent US banks, including Bank of New York Mellon, State Street, and Northern Trust, has rattled investors and prompted concerns about potential challenges within the banking sector.

Moody's announcement on Monday highlighted the "ongoing strain" facing the US banking industry, pointing to increased funding pressures and potential vulnerabilities in capital requirements for lenders. The potential for a downgrade in credit ratings could exacerbate funding costs for these banks.

In reaction to the news, US stocks experienced a decline, with the Dow dropping 159 points (0.5%), the S&P 500 decreasing by 0.4%, and the Nasdaq falling by 0.8%.

Bank stocks were particularly affected by the news, with Wells Fargo, JPMorgan Chase, and Bank of America experiencing losses of 1.3%, 0.6%, and 1.9% respectively. The KBW Bank Index also fell by 1.2%.

Moody's attributed the challenges faced by the US banking sector to several factors, including the recent collapses of Silicon Valley Bank, Signature Bank, and First Republic, as well as the Federal Reserve's series of interest rate hikes, which have impacted the banks' fixed rate securities and loans.

The credit ratings agency also put three other major banks under scrutiny: Truist, Cullen Frost, and U.S. Bancorp. Similar reasons were cited for these actions, along with the mention of "rising risks associated with commercial real estate exposures."

Remote work's impact on the value of US offices was also noted as a concern, with potential consequences for banks that finance commercial real estate deals. This is especially pertinent for regional and community banks with significant exposure to such loans.

Furthermore, Moody's downgraded credit ratings for 10 smaller US banks, citing factors including declining asset values and increased risks related to commercial real estate, particularly for mid-sized banks heavily involved in this sector.

The overall picture painted by Moody's reflects challenges in the US banking sector, characterized by funding cost increases and profitability pressures, partly due to significant interest rate hikes in the country.

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