Signs of Stress in United States Banking

The Analysts of Taking Stock with Kalilah Reynolds say the US banking sector is beginning to show signs of stress after credit rating agency Moody’s downgraded the ratings of 10 banks and put six others under review.

The downgrade comes just weeks after another rating agency, Fitch, downgraded the United State’s overall rating from AAA to AA+. 

Credit ratings are an assessment of the Government’s or financial institution’s ability to meet their debt obligations.

Financial Coach Keisha Bailey explained that Moody’s decision to downgrade these banks signals concern about their capital adequacy.

“They’re basically saying they think several of these smaller US banks are at risk and customers and investors should watch out because capital adequacy may be an issue,” she said.

“And the fact that interest rates keep going higher, tighter financial conditions could create problems at these banks,” she added.

In July, US Federal Reserve raised interest rates to a 22-year high to a range of 5.25% to 5.5%.

Business Journalist David Rose said financial companies have been feeling the brunt of the higher interest rate environment. 

Rose noted that the downgrade of banks could spark another run on deposits, similar to the situation with Silicon Valley Bank and First Republic Bank, which failed earlier this year. 

Customers withdrew their funds from SVB and FRB in doves due to capital adequacy concerns.

Both Bailey and Rose agreed that the situation will be one to watch, to see how the institutions respond and the response of the customers.

In the meantime, Bailey noted that the uncertainty has created additional volatility in the stock market. 

The NASDAQ, Dow Jones and S&P 500 were all down 2% last week.