Moody's finally acknowledged what most of us new last April that the banks were in a world of hurt. ( See: Shulmaven: Winter Comes to the Bank Stocks ) Last night Moody's downgraded 10 banks including Commerce Bancshares and M&T Bank, put 6 under review including BNY-Mellon, Cullen Frost, Truist Financial and U.S. Bancorp and placed 11 banks with a negative outlook including PNC and Fifth Third. The rationale for the downgrades was based upon high funding costs, asset risk in commercial real estate, underwater securities holdings and potentially higher capital requirements. The ratings agency neglected to mention higher FDIC premiums. Moody's also neglected to note that the day will soon come when the Federal Reserve introduces a high inflation scenario in its annual stress test.
The bottom line here is that the banking crisis engendered by the failure of Silicon Valley Bank and First Republic Bank is far from over with that credit standards will continue to tighten. What will ultimately be needed is a re-equitization of the banking system with its concomitant dilution. The one saving grace is that just like the defense industry's "last supper" hosted by Secretary of Defense William Perry in 1993 which signaled a consolidation of that industry, we now have Secretary of the Treasury Janet Yellen urging the regional and community banks to merge. The anti-merger FTC Chair Lina Khan will stay out of the way.
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