Banks Face Reinflation Risks: Moody’s

The banking sector isn’t but out of the woods, with reinflation a danger if banks fail to sufficiently predict price strikes, Moody’s managing director Ana Arsov mentioned at Reuters Next on Thursday.

The U.S. banking sector was in turmoil within the spring as Silicon Valley Bank abruptly collapsed after grappling with massive quantities of unrealized losses spurred by quickly rising rates of interest. Depositors fled SVB inside days after it appeared the agency was in hassle, precipitating its abrupt closure.

That led to a lack of confidence in a swathe of regional and mid-sized banks and Moody’s downgraded 10 U.S mid-sized banks in early August and put six financial institution giants on evaluate for potential downgrades.

Arsov mentioned the outlook for the sector was nonetheless adverse. She mentioned reinflation was a danger, particularly if banks don’t appropriately anticipate rate of interest strikes and alter their portfolios appropriately.

“What we’re seeing in the market is some banks are proactive in actually selling or planning to sell securities with some hit to capital, just to position themselves better,” Arsov mentioned on the sidelines of the convention. “But some banks may be just… waiting and just counting that the forward curve is correct and waiting for that rate cut. But hope is not a strategy.”

A sequence of occasions that led to SVB’s failure together with it promoting U.S. Treasuries to lock in funding prices resulting from expectations of upper charges. That led to unrealized losses throughout the sector coming beneath nearer scrutiny.

Arsov mentioned she is concentrated on banks’ capital for the fourth quarter of 2023 and the primary quarter of 2024.

“What we’re hearing in the market is that banks are willing to restructure some of this portfolio for some capital hit,” Arsov mentioned.

The CEO of Banco Santander U.S. unit, Tim Wennes mentioned on the panel that one considerations for subsequent yr is the potential of losses from industrial actual property loans.

Global banking and securities regulators are additionally nonetheless grappling with the fallout from the collapse of Credit Suisse Group.

The Financial Stability Board (FSB), an influential group of central bankers, regulators and officers from the globe’s high financial powers, final month issued a report on classes to be learnt from the method that led to the rapidly organized acquisition by UBS.

Jean-Paul Servais, chairman of International Organization of Securities Commissions (IOSCO), the worldwide physique that brings collectively the world’s securities regulators, mentioned the group is working with the Financial Stability Board on how residing wills to world banks ought to be structured.

In Credit Suisse’s case, the report mentioned U.S. regulators cautioned in opposition to a possible liquidation, one of many choices of the Swiss authorities, which might have hit bonds owned by U.S. buyers, pointing that may infringe U.S. securities legal guidelines.