US banks face credit rating downgrades over funding risks
S&P Global has recently downgraded credit ratings and revised outlooks for several US banks. These include Associated Banc-Corp, Valley National Bancorp, UMB Financial Corporation, Comerica Bank, KeyCorp, S&T Bank, and River City Bank. This action follows a similar move by Moody's, which cited weaker profitability and funding risks as factors that will likely test the credit strength of the banking sector. Among the reasons for these downgrades are large deposit outflows and higher interest rates.
Rising interest rates challenge bank funding
The increase in interest rates is affecting the funding and liquidity of many US banks. S&P anticipates that deposits possesed by Federal Deposit Insurance Corporation (FDIC)-insured banks will go down as long as the Federal Reserve pursues "quantitative tightening." Earlier this year, the collapse of Silicon Valley Bank and Signature Bank triggered a crisis of confidence, which led to a run on deposits at various regional banks despite authorities implementing emergency measures.
Confidence crisis impacts FDIC-insured deposits
This crisis of confidence has impacted the US banking sector as a whole, resulting in a significant decline in deposits held by FDIC-insured banks. The downgrades and revised outlooks may encourage affected banks to seek alternative funding sources or reduce their reliance on brokered deposits in the coming months. They have to manage their liquidity carefully in this difficult environment.
