While the agency's baseline view is that U.S. officials will broadly succeed in curbing the current turmoil, there is still lingering worry beneath the surface. Hedge-fund manager Bill Ackman, for example, is warning of an acceleration of deposit outflows from banks, and a recent global fund manager survey from Bank of America found that 31% of 212 managers polled regard a systemic credit crunch as the biggest threat to markets.
The risk of a general aversion to risk by financial-market players and a decision by banks to retrench from providing credit is potentially the most potent way in which banking-system troubles could spill over more broadly, according to Moody's. Such a scenario could lead to the "crystallisation of risk in multiple pockets simultaneously," the ratings agency said. This could also affect other sectors and entities with existing credit challenges.
Moody's points out that banks are not the only type of players with exposure to interest-rate shocks. Market scrutiny will focus on those entities that are exposed to similar risks as the troubled banks. Additionally, a misstep by policymakers, who have been focused on inflation, could lead to banking problems spreading more broadly.
The direct and indirect exposure to troubled banks that private and public entities have via deposits, loans, transactional facilities, essential services, or holdings in those banks' bonds and stocks is another potential channel for spillover. Nonbank financial institutions, insurers, and funds are already experiencing a variety of "knock-on effects" as the result of the sudden deterioration of a few U.S. banks, according to Fitch Ratings.
While U.S. Treasury Secretary Janet Yellen has indicated that the U.S. could take additional actions if needed to stabilise the banking system, and Federal Reserve Chairman Jerome Powell has assured Americans that the central bank would use its tools to protect depositors, the risk of banking-system stress spilling over into other sectors and the U.S. economy remains.
Investors continue to weigh the risks to the banking sector, as U.S. stocks finished higher on Thursday. The policy-sensitive 2-year Treasury yield fell to its lowest level this year, while gold futures settled at a more than one-year high.
In summary, there are three ways in which banking-system troubles could spill over more broadly: a general aversion to risk by financial-market players and a decision by banks to retrench from providing credit, direct and indirect exposure to troubled banks that private and public entities have, and a misstep by policymakers. As financial conditions remain tight and growth slows, a range of sectors and entities with existing credit challenges will face risks to their credit profiles.