US Banks Stronger but Outlook for System Remains Negative

The outlook for the US banking system remains negative, with ongoing challenges in the operating environment expected to continue to pressure banks over the next 12–18 months, according to

Moody’s Investors Service, which has issued a report entitled ‘Banking System Outlook: United States of America’.

“Our negative outlook for the US banking system reflects a challenging domestic operating environment, with prolonged low interest rates, high unemployment, weak economic growth and fiscal policy uncertainties,” said

Moody’s senior vice president (SVP), Sean Jones. “Additionally, the threat of contagion stemming from the European sovereign debt crisis undermines economic recovery in the US and exposes banks to a heightened risk of shocks.”

The credit ratings agency (CVRA) adds that macroeconomic challenges trump the fact that its rating outlooks on most US banks have changed to stable from negative since early 2010, with the common driver being banks’ improved ability to handle risks due to their larger capital and liquidity buffers. In addition, since 2010 most banks have returned to profitability.

Nonetheless US banks remain in recovery mode, which is prone to reversal if the economy takes a turn for the worse. Non-performing asset levels are still high, and legacy issues from the financial crisis will take years to resolve, with the latter ranging from the rundown of ‘non-core’ assets to litigation issues and mortgage repurchase demands, says Moody’s. Furthermore, many banks still have significant asset concentrations.

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