Moody’s Changes Outlook on U.S. Banking System to ‘Negative’ Following SVB Collapse

President Joe Biden of the United States of America (USA). Image Credit:

March 15, 2023/Moody’s Investors Service

We have changed to negative from stable our outlook on the US banking system to reflect the rapid deterioration in the operating environment following deposit runs at Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the failures of SVB and SNY. Although the Department of the Treasury, Federal Reserve and FDIC announced that all depositors of SVB and Signature Bank will be made whole, the rapid and substantial decline in bank depositor and investor confidence precipitating this action starkly highlight risks in US banks’ asset-liability management (ALM) exacerbated by rapidly rising interest rates. The Fed has announced a new temporary liquidity facility to offer loans to banks against eligible government securities collateral to help meet their funding needs and reduce contagion risks.

However, banks with substantial unrealized securities losses and with non-retail and uninsured US depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings and capital. Banks with lower unrealized securities losses, stronger capitalization, diverse sectoral exposures, and granular insured deposit bases will be more shielded or benefit from a flight to quality. Our base case is for the Fed’s monetary tightening to continue, which could deepen some banks’ challenges. Further drivers of the outlook are detailed in the overview table and bullets that follow.


Source: Moody’s Investors Service

Rapid deterioration in operating conditions will constrain funding, liquidity and capital at affected banks 

Operating conditions have sharply deteriorated. Pandemic-related fiscal stimulus along with more than a decade of ultralow interest rates and quantitative easing resulted in significant excess deposit creation in the US banking sector. This has given rise to asset-liability management challenges, with some banks having invested excess deposits in longer-dated fixed-income securities that have lost value during the rapid rise in US interest rates, resulting in significant unrealized losses in banks’ available-for-sale and held-to-maturity securities’ portfolios. It appears SVB was forced to sell securities at a loss to meet unexpectedly pronounced deposit drawdowns, precipitating the deposit run that resulted in the bank’s rapid failure. While the Federal Reserve’s new Bank Term Funding Program (BTFP) is constructive, we expect depositor and investor focus will turn to banks that may have a similar mismatch between deposits and asset duration as well as weaker profitability and capital. We expect pressures to persist and be exacerbated by ongoing monetary policy tightening, with interest rates likely to remain higher for longer until inflation returns to within the Fed’s target range. US banks also now are facing sharply rising deposit costs after years of low funding costs, which will reduce earnings at banks, particularly those with a greater proportion of fixed-rate assets. Combined with this most recent stress in the banking sector, further interest rate increases could deepen some banks’ ALM and profitability challenges.

Our base case is that the US will enter a mild recession in the latter part of 2023, with real GDP growth likely remaining below trend in 2024. A gradual rise in the US unemployment rate from an exceptional low of 3.4% as of January 2023 to just under 5% will mute labor market disruptions compared with previous recessions. The housing sector is already weakening. The real estate, construction and manufacturing sectors are set to downshift as rising interest rates, the strong US dollar and weaker growth among trading partners hit domestic demand and exports. We expect headline and core inflation to decline over 2023-24, which should allow the Fed to move to a neutral policy stance in 2025.

Asset risk metrics will rise over the next 12-18 months from historical lows. Both nonperforming loans and net charge-offs (NCOs) are likely to rise following the more benign conditions that resulted from pandemic forbearance programs, multiple rounds of fiscal stimulus and very accommodative monetary policy. Higher interest rates are reducing debt affordability, excess consumer and corporate liquidity is waning, and financial conditions, particularly bank credit, are tightening. Average credit card and bank auto NCOs have been rising and are likely to peak at 5% and 1.5%, respectively, in 2024. Residential mortgage NCOs are likely to rise only modestly over the next several years. The asset quality of leveraged corporate borrowers and lower-income consumers are most at risk. The rise of private credit markets could result in elevated systemic risk, which may spill over to the banks’ commercial and industrial lending via weakening underwriting. Commercial real estate (CRE) loan exposures may become riskier because of hybrid work arrangements. In previous downturns, high CRE concentrations, which are most common among small and mid-sized regional banks, have been a key source of bank credit strains, and even failures. We expect banks will need to increase reserves as the economy worsens later in the year. Banking sector stresses could, in turn, be detrimental to the broader economy, worsening banks’ asset risk.

Banks are generally well capitalized to face the deteriorating operating environment, but unrealized securities losses are a headwind. US banks we rate generally have good capital buffers above regulatory requirements and, for most, capital ratios are likely to remain a core credit strength. For the G-SIBs

1. A rise in capital ratios over the last year is likely to continue, given increasing risk-based regulatory capital requirements. Capital requirements may also rise for large regional banks in 2023 in light of recent events.

2. Annual regulatory stress tests for the largest banks, as well as prudential requirements, may limit material erosion of their solid capital buffers. Some banks will curtail lending, common share repurchases and dividends to preserve capital and liquidity given the stressed operating environment.

Profitability will decline for many banks. Those banks facing increased ALM risk may need to raise deposit rates sharply to stem deposit outflows and avoid crystallization of unrealized losses. Deposit betas are already rising for most banks, and we expect them to rise further in 2023. For banks less affected by the deteriorating operating environment, especially those with strong core deposit funding, rising interest rates will help sustain increases in NIM

3. And NII

4. Realized during 2022, though we do not expect much further improvement during 2023. Fee income provides revenue diversity, but tighter financial conditions will keep pressure on segments like asset management and mortgage banking. Trading revenue may benefit from volatile financial market conditions, though this will entail prudent risk management that may be more difficult in times of elevated volatility and tighter financial conditions. Investment banking fees will lag in the challenging operating environment but may improve in the second half of 2023 from a weaker 2022. Higher credit provisions will be necessary to build loan loss reserves in a recessionary environment.

Funding and liquidity conditions have sharply deteriorated for some banks; the Fed’s new bank funding facility is constructive. The deteriorating operating environment will be felt most keenly by banks exposed to deposit flight. Banks that are perceived to be the most stable will benefit from drawing deposits from other banks, with improvements to liquidity. The Federal Reserve’s BTFP will provide a temporary but helpful backstop to reduce funding risks at banks. However, the Fed’s quantitative tightening (QT) will continue to lower bank deposits, as well as consumers’ drawing down of savings to fund consumption amid higher inflation. QT will reduce banks’ reserve balances at the Fed but the Fed’s new BTFP, if meaningfully utilized, could boost banks’ reserves at the Fed. Loan growth, while slowing, is likely to outpace deposit growth, which will increase the system’s loan to deposit ratio from a near multi-decade low reached during the pandemic. Smaller banks have more rapidly resorted to wholesale funding, such as FHLB

5. Advances, than larger peers, which will continue for those banks most exposed to deposit flight.

The Federal Reserve’s BTFP also has incremental benefit for bank creditors through reducing liquidity risk and supporting franchise value. However, this is temporary support (advances can be requested until at least 11 March 2024) that only applies to eligible collateral that was owned by the banks as of 12 March 2023. Our US bank ratings do not incorporate any uplift for government support, other the existing support assumptions we incorporate into certain debt and deposit ratings of eight G-SIBs

6. Our government support assumptions for US banks are unlikely to change over the next 12-18 months.

Rating universe 


Aggregate key indicators for rated US banks

Aggregate key indicators for rated US banks

Source: Moody’s Investors Service

US banks’ Baseline Credit Assessments (BCAs) are distributed over a six-notch range from a1 to baa3 (Exhibit 3). The median US bank BCA is a3, three notches higher than the global median of baa3. We rate 72 banking groups in the US with 80 banking subsidiaries (Exhibits 4 and 5).


US bank BCA distribution as of 13 March 2023

US bank BCA distribution as of 13 March 2023

Source: Moody’s Investors Service


Rated US banks of 13 March 2023 (by BCA)

Rated US banks of 13 March 2023 (by BCA)

Source: Moody’s Investors Service


Source: Moody’s Investors Service

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