Credit ratings agency Moody’s has put six U.S. banks on review for downgrade, including First Republic Bank, which is one of the largest in the country—a decision that follows the collapse of two banks over the weekend.
In addition to First Republic, the banks under Moody’s downgrade review include Comerica Inc, UMB Financial Corp., Zions Bancorp., Western Alliance Bancorp., and Intrust Financial Corp. The decision by the agency comes after the downfall of Silicon Valley Bank (SVB) and Signature Bank, triggering worries about the health of the American banking sector.
Moody’s pointed out that the share of First Republic’s deposits above the Federal Deposit Insurance Corporation’s (FDIC) insurance threshold is “material,” thereby making the institution’s fund profile “more sensitive” to rapid and large withdrawals by depositors.
“If it were to face higher-than-anticipated deposit outflows and liquidity backstops proved insufficient, the bank could need to sell assets, thus crystalizing unrealized losses on its AFS [available for sale] or HTM [held-to-maturity] securities, which as of December 2022 represented 37.7 percent of its common equity tier 1 capital,” Moody’s said.
Banking Sector Hit Hard
The current banking crisis kicked off on March 10 when Santa Clara-based Silicon Valley Bank (SVB) failed. With more than $200 billion in assets, SVB’s collapse is the second-largest bank failure in the history of the country.On March 12, U.S. regulators announced they were intervening to shut down Signature Bank, which is the third-largest bank failure in American history. On Monday, Moody’s downgraded the debt ratings of Signature Bank into junk territory.
Subsequent collapses sapped investor confidence in American banks, as seen in the stock market on Monday.
Shares of San Francisco-based First Republic fell by more than 60 percent. Phoenix-based Western Alliance Bancorp saw its shares fall by over 47 percent. These were the two worst-performing banking stocks for the day. Zions fell by almost 26 percent, while Comerica declined by over 27 percent.
FDIC Guarantees
Regulators have announced that the FDIC will guarantee all deposits at SVB and Signature Bank. The FDIC usually guarantees deposits of only up to $250,000. But Treasury Secretary Janet Yellen stated that no specific upper-value limit exists for guarantees announced for depositors of the two banks by the FDIC.“By selectively changing the rules after the fact for SVB, the U.S. government now incentivizes greater risk-taking by banks and depositors in the future, teaching large depositors at smaller banks that they can simply throw money at risky banks without diversifying or conducting diligence,” Ramaswamy said.
“Smaller banks like SVB lobbied for years for looser risk limits by arguing that their failures would not create systemic risk and thus would not merit special intervention by the U.S. government, but Secretary Yellen’s announcement reveals that argument to be a farce. Very disappointing.”
The Federal Reserve has announced that it will investigate the failure of SVB, including any supervisory or regulatory failings. The review will be overseen by Michael Barr, the Fed’s vice chair for supervision, and is expected to make its findings public by May 1.
