S&P Global has taken action to downgrade credit ratings and outlooks for several U.S. regional banks, citing concerns about rising funding costs and challenges within the commercial real estate (CRE) sector. The agency’s move reflects the potential stress that higher interest rates, driven by the U.S. Federal Reserve’s policy actions, could place on these banks.
S&P Global highlighted that the surge in interest rates has led to liquidity concerns as funding deposit costs increase. Specifically, the agency lowered the credit ratings on Associated Banc-Corp and Valley National Bancorp due to elevated funding risks and heightened reliance on brokered deposits. UMB Financial Corp, Comerica Bank, and KeyCorp also faced downgrades due to deposit outflows and prevailing higher interest rates, further affecting their credit strength.
This shift in credit ratings could result in higher borrowing costs for the banking sector, which has been striving to recover from the crisis triggered by the collapse of Silicon Valley Bank and Signature Bank earlier in the year. The destabilization of these banks led to a loss of confidence and deposit runs at various regional lenders.
The broader trend of increasing borrowing costs has been evident globally, with U.S. Treasury yields hitting their highest levels in 16 years. This comes amid a sustained bond market sell-off and contrasts with the simultaneous gains seen in U.S. stock index futures, buoyed by large-cap growth stocks.
Moody’s had also recently downgraded the ratings of several U.S. banks, and other rating agencies are keeping a close watch on the sector. The banking environment’s potential for further deterioration has prompted discussions about potential downgrades for entities like JPMorgan Chase and others if operating conditions worsen.
Opinion:
S&P Global’s decision to downgrade the credit ratings of U.S. regional banks underlines the current challenges facing the banking industry. As interest rates rise due to the Federal Reserve’s actions, these banks are grappling with liquidity concerns and increased funding costs, which can strain their credit strength. The commercial real estate sector’s vulnerabilities add another layer of complexity to the situation.
The potential for higher borrowing costs resulting from these downgrades could impact the banking sector’s ability to attract capital and manage their finances effectively. It underscores the interconnectedness of factors that influence financial institutions’ health, from monetary policy decisions to broader economic trends.
The simultaneous divergence between surging Treasury yields and stock market gains exemplifies the broader economic uncertainty and volatility. This environment poses unique challenges for banks as they navigate fluctuations in funding costs and capital market conditions.
As Moody’s and other rating agencies also reevaluate the credit profiles of financial institutions, the sector’s resilience and adaptability will be put to the test. The potential for further downgrades highlights the importance of prudent risk management and the need for a stable and supportive regulatory environment to safeguard the overall stability of the financial system.