Deposit Outflow and Expansion of Unrealized Losses Pointed Out
International credit rating agency Moody's downgraded the credit ratings of 11 regional banks in the United States due to high interest rates and increased financial instability following the collapse of Silicon Valley Bank (SVB) last month.
According to major foreign media including The Wall Street Journal (WSJ) on the 24th, Moody's downgraded the credit ratings of 11 regional banks, including US Bancorp, Zions Bancorporation, Bank of Hawaii, and BOH, on the 21st.
Western Alliance Bancorp, one of the banks most severely affected by this banking crisis, saw its credit rating fall by two notches. As of the end of 2022, more than half of this bank's deposits were uninsured, and in the first quarter of this year alone, 11% of deposits were withdrawn. Deposit outflows lead to increased funding costs for the bank.
Moody's also explained that First Republic will have to rely on higher-cost funding as hundreds of billions of dollars in deposits have left. This bank suspended its quarterly dividend on preferred shares earlier this month.
The US Bank, whose credit rating was downgraded this time, was pointed out for having low capital ratios and large unrealized losses. Previously, U.S. banks invested heavily in U.S. Treasury securities, considered safe assets, as deposits surged due to liquidity expansion triggered by COVID-19. However, with interest rate hikes causing U.S. Treasury prices to fall, unrealized losses have significantly increased. There are concerns that some banks might follow SVB's footsteps by selling Treasury securities at a loss to raise funds for deposit withdrawals. Zions Bancorporation was also cited for problems related to securities portfolio losses and deteriorating capital.
Additionally, Moody's expressed concern over the relatively high exposure of regional banks to U.S. commercial real estate, which is showing signs of recession. U.S. banks account for about half of commercial real estate loans, with some focusing loans intensively on construction, office buildings, and land development.
Moody's analyzed, "Banks are facing increased burdens in managing assets and liabilities and are under pressure on profitability," adding, "The recent events have raised questions about whether banks need to reassess the stability of deposits and their operational methods."
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