Moody’s recently downgraded the credit ratings of several small and mid-sized U.S. banks while also placing larger Wall Street banks under review for potential downgrades.

The credit ratings of 10 banks were lowered by one level, and major banks, including Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust, are being reviewed for potential downgrades. Additionally, the outlook was changed to negative for 11 banks, including Capital One, Citizens Financial, and Fifth Third Bancorp.

Moody’s analysts noted that U.S. banks are facing challenges related to interest rate and asset-liability management risks. The wind-down of unconventional monetary policy is impacting systemwide deposits, and higher interest rates are affecting the value of fixed-rate assets. Many banks have reported growing profitability pressures that could reduce their ability to generate internal capital. Moody’s also mentioned the potential for a mild U.S. recession in early 2024 and concerns about asset quality, particularly in some banks’ commercial real estate portfolios.

The Federal Reserve’s tightening of monetary policy over the past year and a half has increased interest rates, which could exacerbate asset and liability management risks for banks. The report suggests that banks with higher levels of fixed-rate assets on their balance sheets may face constraints in terms of profitability, capital growth, and lending. Regional banks with lower regulatory capital could be at greater risk, especially if the U.S. enters a recession, as asset quality may worsen, leading to potential capital erosion.

Overall, the report highlights the challenges and vulnerabilities that U.S. banks are facing due to changes in monetary policy, interest rate dynamics, and potential economic downturns.

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