Is the US banking industry approaching a new round of turbulence? Bank of America | Rating | USA

Just a week after Moody's downgraded the credit ratings of 10 small and medium-sized US banks and stated that it may downgrade the credit ratings of some large US banks, the US banking industry has been hit by two major bearish factors.

On August 15th local time, following Moody's, another international rating agency, Fitch Ratings, warned that it may downgrade the ratings of dozens of US banks, including JPMorgan Chase. Prior to this, US regulatory agencies stated that they were considering upgrading regulatory measures for large regional banks.

The tightening of regulations and the possibility of a rating downgrade by Fitch have raised concerns among investors about the health of the industry, with US banking stocks generally falling on the same day. As of the close on the 15th, the S&P 500 Bank Index fell 2.75%, reaching its lowest closing point in a month; JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Citigroup, and Morgan Stanley experienced declines ranging from 1.3% to 3.2%.

However, some industry insiders do not believe that this panic sentiment will continue to ferment. Yanasievich, portfolio manager and chief strategist at Natixis Investment Managers, said, "We knew this would happen long ago, and a rating downgrade reflects what the market has already digested and taken into account." He added, "This is just a reaction to general sentiment.".

Among medium-sized banks, on the 15th, both Alenes Western Bank and Western Pacific United Bank fell by about 4%. According to the 13F file disclosed by the US Securities and Exchange Commission on the 15th, the hedge fund company Scion Asset Management, led by Michael Bury, the prototype character of the movie "Big Short," has cleared shares in these two banks in the second quarter.

Approaching the beginning of another turbulence?

Fitch Ratings analyst Wolf warned in an interview on the 15th that the US banking industry is gradually approaching the beginning of another turbulence, with dozens of US banks facing the risk of comprehensive downgrades, including possibly several of the largest banks such as JPMorgan Chase.

In June of this year, Fitch Ratings downgraded the "operating environment" rating of the US banking industry from AA to AA -, citing pressure to downgrade the US credit rating, loopholes in regulatory frameworks, and uncertainty in the Federal Reserve's subsequent interest rate hike path. Wolf said that if Fitch downgrades the overall industry rating again, it will have to reassess the ratings of over 70 US banks it tracks one by one. In this situation, the ratings of JPMorgan Chase and Bank of America may be downgraded from AA - to A+.

Just last week, Moody's downgraded the credit ratings of 10 small and medium-sized banks in the United States and placed 6 large banks on the downgrade watch list, including Bank of New York Mellon, Bank of America, and State Street.

Earlier this month, Fitch unexpectedly downgraded the credit rating of the US government and issued warnings about the increasingly heavy debt burden and political dysfunction in Washington. Fitch's credit rating for the United States is currently AA+, one level lower than the highest level of AAA.

During this period, the yield of long-term treasury bond bonds of the United States rose sharply, and the floating losses on the asset side further expanded as banks suffered from rising interest rates and unstable deposits. As of the end of trading in New York, the benchmark 10-year US Treasury yield closed at 4.215%, reaching its highest level of 4.274% since October 24th last year.

Wolf said that Fitch intends to send a signal to the market this time, indicating that although the downgrade of bank ratings is not an established fact, there are indeed risks.

Morgan Stanley analysts say that banks with downgraded ratings will have to pay higher costs when selling bonds, further compressing their profit margins. They are even concerned that some banks may be completely blocked out of the bond market.

The continuous sell-off of US banking stocks has exposed the fragility of investor confidence in the industry. As for concerns about the spread of financial risks in the market, Ravi Balakrishnan, Chief Economist of JPMorgan Europe, told First Financial reporters that regional banking pressure in the United States has not yet spread to the eurozone.

"Despite the relatively imperfect banking system and low deposit insurance coverage, the pressure on regional banks in the United States has not substantially affected Eurozone banks. More broadly, although European banks are not as profitable as their US counterparts, they score higher in several indicators such as solvency, liquidity, and fund stability," said Balakrishnan.

Strict regulation

In addition, there have been new actions in banking regulation. The Federal Deposit Insurance Corporation of the United States, Glenberg, announced on the 14th that it will require banks with assets exceeding $100 billion to submit more detailed disposal plans, known as "living wills," and issue new unsecured bonds for capital restructuring of bankrupt banks.

During his speech at the Brookings Institution that day, Glenberg stated that the FDIC, Federal Reserve, and Office of the Comptroller of the Currency plan to launch formal proposals "in the near future.". He said, "The proposed rules will require banks to provide a strategy that does not rely on 'weekend emergency sales'." He referred to the practice of regulatory authorities taking over banks during market closures.

He said the bank will explain how it was placed in a bridge bank and how they continued to operate without the parent company. Glenberg stated that such plans would make it much easier to spin off bankrupt banks and partially sell them. This may help prevent a repeat of the situation at the First Republic Bank. At that time, the bank sold assets and deposits to JPMorgan Chase, sparking criticism of the increasing concentration of banking business from the outside world.

After the 2008 financial crisis, global regulatory agencies began to require global systemic banks to submit detailed "living wills," but smaller US banks did not face the same requirement. "These may be the lessons we should learn from the 2008 financial crisis. What happened earlier this year provided us with another opportunity. This time, I don't think we will miss out," Grunberg said.

In addition to new regulations regarding disposal plans, Glenberg stated that the FDIC and other regulatory agencies will advance a proposed rule requiring large local banks with assets of $100 billion or more to issue additional bonds to provide additional support in the event of bankruptcy to compensate for losses.

Last October, the FDIC made a similar proposal for large banks with assets of at least $250 billion. Glenberg stated on the 14th that the spring banking crisis highlighted that bond requirements should also cover regional banks.

Of course, this move has also intensified market concerns about stricter regulation. As regulatory agencies are eager to fill the gaps in the crisis earlier this year, banks have felt the pressure of stricter regulatory recommendations.