Regional Bank Downgrades
Moody’s Investors Service recently announced its intention to downgrade the credit ratings of six US regional banks due to their heavy reliance on insured deposits, making them vulnerable to large and rapid withdrawals from depositors. Moody’s decision follows a recent stock market session that saw the value of First Republic Bank, based in San Francisco, drop by 60% on March 13.
Moody’s cited First Republic Bank’s high reliance on uninsured deposit funding, substantial unrealized losses in its securities portfolios, and low level of capitalization relative to its peers as reasons for its pessimism. The bank responded by assuring investors that it has diversified sources of financing and strong capital and liquidity positions, with over $70 billion in available unused liquidity to fund operations.
Moody’s also expressed concerns about Zions Bancorp, warning that it may downgrade the bank’s credit rating if its deposit base erodes markedly, triggering asset sales, loss crystallization, and a higher reliance on market funding. Ratings could also be downgraded if Moody’s considers that management actions taken or envisioned by the bank will not be sufficient to preserve its profitability and capitalization, which may result in significant franchise erosion.
Moody’s recent move comes amid criticism of the credit-rating company’s handling of Silicon Valley Bank’s rating, which was downgraded only after regulators shut it down, and the recent failures of credit-rating providers to adequately assess the risk of securitized mortgage instruments that contributed to the 2008 subprime mortgage crisis.
Moody’s review of regional banks highlights the need for more accurate risk assessments by credit-rating providers and a better understanding of the risks associated with deposit funding for banks. As the market continues to evolve, it is important for banks to remain vigilant in their risk management practices and for regulators to ensure that credit-rating providers are providing accurate and timely assessments of risk. In the end, it is the responsibility of all stakeholders to ensure the stability and resilience of the financial system.