Banking sector faces risks from inflation -Moody's

FILE PHOTO: Signage is seen outside the Moody's Corporation headquarters in Manhattan, New York

By Paritosh Bansal and Tatiana Bautzer

NEW YORK (Reuters) - The banking sector is not yet out of the woods, with reinflation a risk if banks fail to sufficiently predict rate moves, Moody's managing director Ana Arsov said at Reuters Next on Thursday.

The U.S. banking sector was in turmoil in the spring as Silicon Valley Bank abruptly collapsed after grappling with large amounts of unrealized losses spurred by rapidly rising interest rates. Depositors fled SVB within days after it appeared the firm was in trouble, precipitating its abrupt closure.

That led to a loss 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 bank giants on review for potential downgrades.

Arsov said the outlook for the sector was still negative. She said reinflation was a risk, especially if banks do not correctly anticipate interest rate moves and adjust 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 said on the sidelines of the conference. “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 events that led to SVB's failure including it selling U.S. Treasuries to lock in funding costs due to expectations of higher rates. That led to unrealized losses across the sector coming under closer scrutiny.

Arsov said she is focused on banks’ capital for the fourth quarter of 2023 and the first 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 said.

The CEO of Banco Santander U.S. unit, Tim Wennes said on the panel that one concerns for next year is the potential of losses from commercial real estate loans.

Global banking and securities regulators are also still grappling with the fallout from the collapse of Credit Suisse Group. The Financial Stability Board (FSB), an influential group of central bankers, regulators and officials from the globe's top economic powers, last month issued a report on lessons to be learnt from the process that led to the hastily arranged acquisition by UBS. Jean-Paul Servais, chairman of International Organization of Securities Commissions (IOSCO), the international body that brings together the world's securities regulators, said the group is working with the Financial Stability Board on how living wills to global banks should be structured. In Credit Suisse's case, the report said U.S. regulators cautioned against a potential liquidation, one of the options of the Swiss authorities, which would have hit bonds owned by U.S. investors, pointing that would infringe U.S. securities laws.

(Reporting by Paritosh Bansal Tatiana Bautzer and Megan Davies; Editing by Lisa Shumaker and David Gregorio)