Rating agency Moody's slashed its outlook on the entire U.S. banking system to negative in the wake of recent bank turmoil in the country.
"We have changed to negative from stable our outlook on the U.S. banking system to reflect the rapid deterioration in the operating environment following deposit runs at Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the failures of SVB and SNY," Moody's Investors Service said in a report on Monday.
Although U.S. authorities have stepped in to shore up deposits at SVB and Signature Bank to restore confidence in the banking system, the rating firm said other institutions with unrealized losses or uninsured depositors still could be at risk.
"Banks with substantial unrealized securities losses and with non-retail and uninsured U.S. depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings and capital," Moody's said.
The credit rating firm said that pandemic-related fiscal stimulus and more than a decade of ultralow interest rates and quantitative easing resulted in significant excess deposit creation in the U.S. banking sector.
"This has given rise to asset-liability management challenges, with some banks having invested excess deposits in longer-dated fixed-income securities that have lost value during the rapid rise in U.S. interest rates, resulting in significant unrealized losses in banks' available-for-sale and held-to-maturity securities' portfolios," it noted.
Moody's said it expects pressure on the U.S. banking sector to persist as the Federal Reserve continues to hike interest rates to combat inflation.
The firm also projected the U.S. economy to fall into recession later this year, further pressuring the industry.
SVB was shut down by U.S. regulators last Friday after the tech-focused lender reported massive losses from securities sales, triggering a run on the bank's deposits. It marked the second-largest bank failure in U.S. history and was quickly followed by the closure of cryptocurrency sector lender Signature Bank on Sunday.
Both collapses came just days after last week's news that Silvergate, another key lender to the crypto industry, would wind down.
The Federal Reserve on Sunday announced a new emergency loan program to bolster the banking system's capacity.