Fitch Ratings continues to monitor the rapidly changing funding and liquidity environment for U.S. banks, in light of the recent failures of Silicon Valley Bank and Signature Bank and the related market volatility. This is in the context of our previously outlined view that funding and liquidity will be a challenge for U.S. banks given expectations for a sustained period of higher rates coupled with large unrealized losses on bond portfolios which could limit funding flexibility. Moreover, quantitative tightening (QT) will cause industry deposits to shrink from pandemic highs, further pressuring bank funding and liquidity profiles.
The two bank failures prompted the Federal Reserve to create a special program, the Bank Term Funding Program (BTFP). Key features of the program allow banks to pledge U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, which is intended to alleviate solvency concerns regarding unrealized losses on these securities. In addition, the FDIC will ensure even uninsured depositors are made whole in the case of the two failed banks.
These actions will support system liquidity and reduce the risk of banks having to crystallize unrealized losses on high quality, but long duration securities portfolios. However, it remains to be seen whether these measures will be sufficient to stabilize investor and depositor confidence in other vulnerable institutions or whether additional measures will be needed.
Fitch’s Funding & Liquidity assessment forms a key part of our rating criteria and deposit structure and access to contingent liquidity are important considerations within this assessment. In the current environment, we are particularly assessing depositor behaviour and liquidity profiles across our rated portfolio as these have the capacity to act as a ‘weakest link’ in ratings as depositor attrition may not be reversed. In addition, deposit erosion can be negative for our rating assessment of a bank’s franchise and longer-term profitability.