Liquidity Pressures Unfolding Rapidly For Some But Not All US Banks

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March 17, 2023/Fitch Ratings

Fitch continues to monitor the rapidly changing funding and liquidity environment for U.S. banks, and has been evaluating its rated bank portfolio to ascertain deposit flows, particularly over a stressful period beginning just prior to the failure of SVB Financial to the present. Funding and liquidity remain a key focus for U.S. banks, and following our comment on March 13, our assessment suggests that most banks can manage moderate deposit outflows. We expect that any rating actions will be institution-specific and not broad-based, with any potential future rating action focused on outliers.
Since March 9, 2023, based on a sampling of Fitch-rated banks, we estimated the average deposit attrition was less than 1.0%, excluding banks where we have taken rating action, which is only slightly worse versus the prior average of the last 20 weeks. While events are fluid, our recent analysis suggests that industry deposit attrition trends are within ratings expectations for the vast majority of banks in our rated portfolio, given our assumption for industry-wide deposits to shrink as articulated in our January report, U.S. Banks: Sustained Period of Higher Rates Raises Liquidity Pressures.
 In addition to deposit flows, Fitch has been gauging access to and usage of wholesale and contingent liquidity facilities. Fitch is also evaluating any potential durable impacts to franchises and earning profiles. In the current environment, banks with less liquid securities portfolios due to longer duration and/or designation as held-to-maturity are viewed as having less funding flexibility, despite more accommodative funding facilities such as the Bank Term Loan Program (BLTP).
Fitch revised its Sector Outlook on U.S. banks to “Deteriorating” from “Neutral” on Nov. 28, 2022 in part reflecting our expectations that that deposit outflows and rising betas would markedly shift as the Federal Reserve continued its unprecedented pace of monetary tightening and unwinding its quantitative easing program.
 While we continue to note funding and liquidity pressures represent an increasing vulnerability for the sector as a whole, the pace and unpredictable manner in which these crystallized for certain institutions has far exceeded our baseline expectations. Recent events are considered unforeseeable risks which by their nature Fitch cannot incorporate. A rapid withdrawal of liquidity can result in multi-notch downward changes in ratings.

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