Moody's put U.S. banks on a negative watch list and warns of a 'mild' recession

Aug. 8 (UPI) -- A drain on deposits, along with the decline in asset value in a high-interest rate environment, led to a downgrade in ratings for a handful of U.S. banks, Moody's said.

Moody's Investors Service downgraded the credit rating for smaller lenders such as Pinnacle Financial and put major banks such as Northern Trust under review.

In a report published late Monday, Moody's said banks may be facing a liquidity and capital crisis "as the wind-down of unconventional monetary policy drains system-wide deposits and higher interest rates depress the value of fixed-rate assets."

Second quarter results for many banks, meanwhile, revealed a struggle to generate profit at a time when Moody's expects a "mild" recession to emerge in the U.S. economy by early 2024.

The investment service added that there was a particular risk coming from the commercial real estate portfolios for some of the banks under review.

On top of concerns about China's economic performance, the move on banks led to a downturn on Wall Street. All major U.S. stock indices were in the red during the Tuesday session, with the S&P 500 down 1% as of 11:30 a.m. EDT.

Among the major banks highlighted by Moody's, shares in Northern Trust were down around 3% to trade at $78.36 per share.

"All the headlines just turned bearish," said Ed Moya, a senior market analyst for OANDA.

The concern is reminiscent of early-year fears of a banking crisis that was triggered by the collapse of Silicon Valley Bank, Silvergate and others. Silvergate was the likely victim of over-reliance on volatile, and somewhat untested, cryptocurrencies, while SVB was caught in something of a contagion of fear.

Former SVB CEO Gregory Becker told congressional leaders earlier this year that rumors about the health of the banking sector spread quickly online, triggering a run on deposits that helped usher in the bank's collapse.

The news from Moody's followed last week's decision from ratings agency Fitch to lower the rating of the United States from the top-tier AAA to AA+ after warning the political battle over the nation's debt ceiling was cause for concern.

"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management," Fitch said as the agency pointed to "expected fiscal deterioration over the next three years."