Moody's downgraded the credit outlook of the US banking system, forecasting an economic recession this year

Moody's downgraded the credit outlook of the entire US banking system to "negative" from the previous "stable" level after three consecutive bank failures in less than a week in the country.

On March 14, Moody's Investors Service, one of the three largest and most reputable credit rating agencies in the world, lowered the credit outlook of the entire US banking system to "negative" from "negative". stable” after three consecutive bank failures in less than a week in the country.

Moody's said it made the move to downgrade the US banking system on the basis of the bank failures that prompted the authorities to step in on Sunday with a plan to secure deposits and maintain stability. other institutions affected during the crisis.

“We had to change our outlook for the US banking system to 'negative' from 'stable' to reflect the rapid deterioration in the banking system's operating environment following the withdrawals. massive cash outflows from Silicon Valley Bank (SVB), Silvergate Bank and Signature Bank, as well as the collapse of SVB and Signature Bank," Moody's said in a report.

Earlier on the same day, Moody's warned that it may downgrade or consider lowering credit scores for 7 US financial institutions.

According to CNBC, these moves are important because they can lead to a decrease in credit scores, which increases borrowing costs for the industry as a whole.

In a statement lowering the credit outlook for the entire US banking system, Moody's noted the strong measures that US authorities have implemented to handle failed banks. However, Moody's said that other financial institutions with unrealized losses or uninsured deposits may still be exposed to risk.

The US Federal Reserve (Fed) recently announced the establishment of a mechanism to ensure that financial institutions with liquidity problems have access to cash.

The US Department of Finance is ready to provide $25 billion for this program, and commits depositors with more than $250,000 - exceeding the federal insurance ceiling - at SVB and Signature will have full access to their deposits.

Still, Moody's says there are concerns: "Banks with large losses from unrealized securities portfolios and with uninsured deposits may remain vulnerable. with the battle for depositors – the battle with negative effects on capital flow, liquidity and profitability”.

Bank stocks rose sharply on Tuesday, despite Moody's downgrade of its credit outlook, helping US stocks rebound strongly.

The US bank failures come as the Fed sharply raised interest rates over the past year to combat the country's highest inflation in more than 40 years. Moody's forecasts that the Fed will continue to raise interest rates. Specifically, this organization said: "We believe that the pressure on the US financial system will persist and be exacerbated by the continued tightening campaign of monetary policy, with interest rates likely to be maintained. stay high for a longer period of time until inflation falls back to the Fed's target range," Moody's said. Moody's also forecasts that the US economy will fall into recession this year, increasing pressure on the banking system.

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