Big Three credit rating agency Moody’s has downgraded numerous regional banks in the United States due to weak earnings last quarter and sizable unrealized losses, according to the firm’s Monday note.

Meanwhile, banking giants including Bank of New York Mellon (BK.N), US Bancorp (USB.N), State Street (STT.N) and Truist Financial (TFC.N) have been placed on review for potential downgrades.

Stress in the Banking Sector

As reported by Reuters on Tuesday, Moody’s note highlighted “profitability pressures” at many banks that are expected to hinder their ability to generate further capital. Banks downgraded by the firm include M&T Bank (MTB.N), Pinnacle Financial Partners (PNFP.O), Prosperity Bank, and BOK Financial Corp (BOKF.O).

Meanwhile, high exposure to commercial real estate (CRE) poses a significant risk due to the nation’s high-interest rate environment. Last month, the Federal Reserve rose its benchmark rate to between 5.25% and 5.5% – its highest level since January 2001.

“This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline, with particular risks in some banks’ commercial real estate portfolios,” the note added.

According to Federal Reserve survey data from last week, U.S. banks reported both weaker loan demand and tighter credit standards in Q2.

The U.S. banking sector has already been plagued by a crisis of confidence this year, with Silvergate Bank, Signature Bank, and Silicon Valley Bank collectively collapsing in March. The latter fell as customers rushed for the exits when the bank reported that it had realized a $1.8 billion loss on its long-term bond portfolio.

Indeed, Moody’s warned that U.S. banks sitting on high unrealized losses face similar risks related to a crisis of confidence, especially given today’s high-interest rate environment.

Government Gets Downgraded

High rates are part of what has prompted Fitch Ratings – another top-rated agency – to downgrade the U.S. government’s credit to AA+ as of last month, away from the upper echelon shared with international competitors.

Given the country’s high debt-to-GDP ratio, the agency noted that the country would start struggling to manage growing interest payments as it rolled over existing debt at a higher borrowing rate.

The government’s annual interest payments have skyrocketed since last year and now approach $1 trillion. Mike Novogratz, CEO of Galaxy Digital, has told followers to buy Bitcoin in response.