When banks get downgraded, it’s not a good sign for the future economy

August 9 – The bond credit rating business, Moody’s, has downgraded the credit rating of 10 different banks – some of which are right here in our backyard. 

Two on the list are Fulton Financial Corporation and M&T Bank. 

Additionally, PNC and Truest were put on watch lists. They were not downgraded, but Moody’s is watching them.

Attorney Clint Barkdoll noted, “When this news broke yesterday morning, the market took a steep downturn. These bank stocks were down sharply, but then as the day wore on, the market largely recovered and these bank stocks, even though they closed down, were just down by a fraction. They didn’t close down as sharply as they were in the morning and what a lot of the Wall Street analysts were saying was that they were not surprised by the downgrade. A lot of these factors that Moody’s cited, Wall Street had already baked into the price of these stocks.”

Moody’s is pointing to the increased pressure in the current banking environment and high interest rates for the dip in the scores. 

Barkdoll explained, “It’s deterring people from borrowing money so that’s a hit on bank earnings. It’s also costing banks more on depositors. Banks make a lot of money by holding deposits on accounts. As these interest rates keep going up, that’s making it more expensive for banks to operate. Moody’s is also citing liquidity concerns. Now all of these banks are still investment grade. Moody’s is saying they’re not in danger of closure or anything like that. So as a customer, you’re not going to see any changes. But it’s nonetheless noteworthy that Moody’s did this. These are 10 large regional banks all over the country that Moody’s is saying that they think they’re going to be in a very tough environment going forward for quite some time.”

Michele Jansen of NewsTalk 103.7FM added, “And Biden going around touting Bidenomics, I bet they’re going to be changing their campaign message pretty soon here, because the spending that the government is doing, the modern monetary theory, is predictable. If you keep spending and printing money and then the Feds try to slow down the economy, you’re going to get those interest rates that are just killing these banks. I was a little disturbed at a comment that Moody’s made about the banks could face more pressure if the economy enters a recession, which this agency believes will happen early next year. They’re saying history suggests that recessions associated with banking strains are deeper and more protracted. That’s also bad news for the Biden administration trying to tout Bidenomics ahead of the 2024 election and bad news for all of us.”

A mild recession is predicted for the first quarter of 2024. 

Barkdoll said, “They’re also citing the fact that a lot of these big regional banks are sitting on a lot of commercial loans, think things like shopping malls, and city center office buildings where the vacancy rates are at all time records. The rating services are concerned about that because there have been concerns about defaults. That’s already happening on the West Coast, Los Angeles and San Francisco. The people that own those big buildings simply aren’t able to pay the mortgages. Ultimately, the banks are the ones that might have to take a haircut if that dynamic continues to spread, so it’s definitely a problem.”

The average interest rate now in high yield money market accounts is at 5.17 percent, which is also an historic high. 

Barkdoll said, “That creates a lot of pressure on these banks because people that are sitting on deposits in a checking or savings account, they’re moving money off of those sheets to these money market accounts at brokers to get returns of 5 percent, so that’s another pressure point on these banks.”