Wall St. Slides After Moody's Bank Downgrades Credit Ratings

Facts

• The stock market slid on Tuesday afternoon, after credit rating agency Moody's downgraded ratings for 10 small and regional lenders and placed six banks on review for a potential downgrade, dropping the value of global bank stocks.¹
• The Dow Jones fell 159 points (0.45%), while the S&P 500 dipped 0.42%. Banking giant Goldman Sachs led the decline, trading 2% lower, while JPMorgan Chase and the S&P Bank ETF dropped 0.6% and 1.3% respectively.²
• The banks put on notice by Moody's include the Bank of New York Mellon, US Bancorp, State Street, and Truist Financial. Italy's surprise approval of a 40% windfall tax on lenders contributed to the global bank sell-off, as major Italian banks saw shares drop by between 5.9% and 9%.³
• Moody's cited concerns over financial strength in the face of rising interest rates and shaky market confidence after high-profile bank failures this year. Remote work will also continue to pressure banks invested in commercial real estate.⁴
• In its report, Moody's says the US is on course for a mild recession in early 2024 and that asset quality will fall from "solid but unsustainable levels." The US Federal Reserve's goal of reducing inflation to 2% could spur more rate hikes, putting more pressure on banks and the market.⁴
• BOK Financial Corporation and M&T Bank Corporation were also downgraded, as sluggish Chinese import and export growth in July also troubled world markets and while investors await the forthcoming release of July's US inflation data and major corporate earning reports.⁵

Sources: ¹Reuters (a), ²CNBC, ³Reuters (b), ⁴Associated Press, and ⁵Yahoo Finance.

Narratives

• Narrative A, as provided by Barron's. Between rocketing interest rates and the collapse of three major US banking players, the financial sector seems prepared for whatever might come its way. The banking sector has shown remarkable resilience this year, and Moody's is merely following in the footsteps of Fitch's downgrade of the US sovereign credit rating. Compared to what the banks have already faced, this move will have a negligible impact and is not a cause for serious alarm.
• Narrative B, as provided by The New York Times. There is a real risk of crisis in the US banking sector, the beginning of which may have already been marked by the high-profile failures of Silicon Valley Bank and First Republic. Rising interest rates have eroded the value of banks by trillions of dollars, as commercial real estate loan defaults have jumped in the face of remote work. It is the small and regional banks, such as those that Moody's has downgraded, that underwrite businesses and support swathes of the US economy. The detrimental repercussions of this development should not be underestimated.

Predictions