Moody’s has downgraded its outlook on the entire U.S. banking system to negative from stable due to a “rapidly deteriorating operating environment.” The rating agency cited key bank failures that prompted regulators to intervene with a dramatic rescue plan for depositors and impacted institutions. Moody’s believes that banks with substantial unrealized securities losses and uninsured US depositors could be at risk from depositor competition or flight, which could adversely affect their funding, liquidity, earnings, and capital. This move could impact credit ratings and thus borrowing costs for the sector.
The Federal Reserve recently established a facility to ensure that institutions facing liquidity problems would have access to cash, with the Treasury backstopping the program with $25 billion in funds. However, Moody’s believes that banks with unrealized losses or uninsured depositors may still be at risk. Moody’s also noted that an extended period of low rates combined with pandemic-related fiscal and monetary stimulus has complicated bank operations. The firm expects the US economy to fall into recession later this year, further pressuring the industry.
Moody’s downgraded Signature Bank and placed First Republic, INTRUST Financial, UMB, Zions Bancorp, Western Alliance, and Comerica under review for potential downgrades. SVB, Silvergate Bank, and Signature Bank were hit with deposit runs, resulting in their failures. Moody’s noted that depositors with more than $250,000 at SVB and Signature would have full access to their funds, but other banks could still be at risk. Despite the downgrade, bank stocks rallied strongly, with the SPDR Bank exchange-traded fund rising nearly 6.5% in morning trade.
The banking system as a whole
The U.S. banking system has been facing several challenges in recent years. One of the major problems is the shrinking number of black-owned banks. According to NPR, there were only 21 black-owned banks in the United States in 2020, down from 36 a decade ago. This is concerning because these banks serve minority communities that are often underserved by mainstream banks. The consolidation of the banking industry has also led to fewer choices and less competition, which can harm consumers.
Another issue that has become apparent during the coronavirus pandemic is the need for banks to improve their efficiency and customer experience. McKinsey suggests that digital self-service and operational trade-offs can help banks address these challenges . However, this may not be enough to solve the underlying problems of the banking system.
One possible solution that has been proposed is the use of decentralized banking systems, such as Bitcoin. Unlike traditional banks, Bitcoin operates on a decentralized network, which means that it is not controlled by any central authority. This makes it more resistant to fraud and hacking, and it also offers more privacy to users. However, Bitcoin is still a relatively new technology, and it has its own set of challenges and limitations.
Another potential solution is the use of centralized bank digital currencies. According to a Gilder Lehrman Institute essay, European countries have had fewer banking crises than the United States because they had central banks that could lend to banks under stress . A central bank digital currency would operate on a centralized network, but it would still offer some of the benefits of decentralized systems, such as faster transactions and greater security.
While both decentralized and centralized banking systems have their advantages and disadvantages, it is important to consider the broader implications of these technologies. Decentralized systems like Bitcoin may offer more privacy and security to users, but they also raise concerns about money laundering and illicit activities. Centralized bank digital currencies may offer greater stability and security, but they could also lead to greater government surveillance and control.
Ultimately, the future of the banking system will depend on a variety of factors, including technological innovation, regulatory policies, and consumer preferences. It is important for individuals to educate themselves about the pros and cons of different banking systems and to advocate for policies that promote financial stability and inclusivity. Whether Bitcoin or centralized bank digital currencies will be the way of the future remains to be seen, but it is clear that the banking system needs to evolve to meet the needs of a rapidly changing world.