US Banking System Outlook Stable, As Economy Grows and Regulation Cements Capital and Liquidity Improvements

The outlook for the US banking system is stable, as US banks continue to strengthen their balance sheets, says Moody's Investors Service in its report "Banking System Outlook: United States of America."

The outlook was last changed in May 2013 to stable after being negative for five years. Moody's banking system outlooks reflect the rating agency's expectations for fundamental business conditions in the industry over the next 12 to 18 months.

"The continued recovery of the US economy will further support US banks' asset quality over the next 12-18 months," said Allen Tischler, a Moody's Senior Vice President and co-author of the report. "Additionally, US banks' balance sheets remain strong, supported by regulators' more stringent capital and liquidity requirements."

Continuing economic growth will also help keep credit costs low, as improving employment fundamentals, low interest rates, and healthy corporate profits support borrowers' debt-servicing capacity, says Moody's.

But, while the improving US economy will boost banks' overall health, Moody's notes that persistently low interest rates will dampen core profitability. Historically low short-term interest rates, along with intense pricing competition, are compressing net interest margins. Meanwhile, although long-term interest rates have recently declined, Moody's does not expect a material rebound in mortgage banking revenue. Moreover, capital markets-related revenues are on a long-term downward trend.

Moody's notes that banks' profitability pressures are prompting a deterioration of underwriting standards, which increases risk within the system. However, this is not an immediate concern, as these more poorly underwritten loans will take time to constitute a significant portion of bank balance sheets.

The outlook for the US banking system is stable, as US banks continue to strengthen their balance sheets, says Moody's Investors Service in its report "Banking System Outlook: United States of America."

The outlook was last changed in May 2013 to stable after being negative for five years. Moody's banking system outlooks reflect the rating agency's expectations for fundamental business conditions in the industry over the next 12 to 18 months.

"The continued recovery of the US economy will further support US banks' asset quality over the next 12-18 months," said Allen Tischler, a Moody's Senior Vice President and co-author of the report. "Additionally, US banks' balance sheets remain strong, supported by regulators' more stringent capital and liquidity requirements."

Continuing economic growth will also help keep credit costs low, as improving employment fundamentals, low interest rates, and healthy corporate profits support borrowers' debt-servicing capacity, says Moody's.

But, while the improving US economy will boost banks' overall health, Moody's notes that persistently low interest rates will dampen core profitability. Historically low short-term interest rates, along with intense pricing competition, are compressing net interest margins. Meanwhile, although long-term interest rates have recently declined, Moody's does not expect a material rebound in mortgage banking revenue. Moreover, capital markets-related revenues are on a long-term downward trend.

Moody's notes that banks' profitability pressures are prompting a deterioration of underwriting standards, which increases risk within the system. However, this is not an immediate concern, as these more poorly underwritten loans will take time to constitute a significant portion of bank balance sheets.

Read more on

Suggested Articles

Some of you might have already been aware of the news that Questex—with the aim to focus on event business—will shut down permanently all media brands in Asia…

Some advice for transitioning into an advisory role

Global risks are intensifying but the collective will to tackle them appears to be lacking. Check out this report for areas of concern