Following Fitch’s US downgrade, Moody’s too decided to cut the rating of small and medium-sized American banks.
After Fitch downgraded the US from triple-A to AA+, Moody’s announced on Monday a cut to many American banks’ ratings. Moody’s and Fitch are two of the most prestigious rating agencies in the world.
Moody’s job is to keep track of the financial reliability of global institutions, from countries to banks to large corporations. They have a rating system from AAA to C. Fiscal behemoths like Luxembourg and Germany have the highest rating while struggling institutions like Venezuela and Lebanon have the lowest.
On Monday, Moody’s announced the downgrading of ten US banks, including Truist Financial, Bank of New York Mellon, US Bancorp, and State Street. Moody’s targeted small- and medium-sized banks, warning of possible future cuts to larger institutions as well.
In particular, Moody’s revealed it is keeping an eye on major banks including Capital One, Citizen Financial, and Fifth Third Bancorp.
"Many banks’ second-quarter results showed growing profitability pressures that will reduce their ability to generate internal capital," Moody’s stated.
Why the downgrade
Earlier last week, Fitch downgraded the US overall grade citing concerns about constant debt ceiling crises. Though last May President Biden and Republican speaker Kevin McCarthy reached an agreement, suspending the debt ceiling until 2025, Fitch downgraded the US anyway.
Similarly, Moody’s downgrade comes months after a worrying banking crisis in the United States. Within less than 90 days, three major banking institutions had collapsed completely. Silicon Valley Bank, Signature Bank, and First Republic were among the country’s largest lenders.
Their collapse caused shock waves across the world’s banking system, shaking even European institutions like Deutsche Bank and Credit Suisse.
Moody’s recognized that banks are experiencing strong liquidity pressure. The American Federal Reserve implemented the fastest monetary tightening policy in its history, raising interest rates up to 5,5%.
The Federal Reserve is trying to cool inflation down as fast as possible, but core consumer prices remain high. Meanwhile, high interest rates are also putting pressure on American corporations. Excluding large tech companies, small and medium-sized corporations are going bankrupt worryingly fast.
Industrial output has fallen back to COVID levels, signaling a contraction in the crucial manufacturing sector.
A recession is still in the air. Analysts predict an American GDP contraction in early 2024, while the European Union could fall into a recession even sooner.
Markets are hoping July will be the last rate hike by the Federal Reserve. They hope the Fed will pursue a stabilization policy, starting with rate cuts in June 2024. But Fed Chairman Jerome Powell has not expressed any of these intentions, waiting for more data before taking a decision.
