A soft landing for the banking industry isn’t in the cards according to the credit experts

How healthy are America’s largest banks? On that question, investors and the credit ranking agencies don’t see eye to eye.

Just before Thanksgiving, Moody’s Investors Service downgraded rankings for three banks you may have heard of – Bank of America, JPMorgan Chase and Wells Fargo. For most of 2023, Moody’s ranked the banking giants as stable.

Now they’re into negative territory. All three banks are laying off hundreds of workers throughout the country. Mortgage departments in particular are being gutted as nearly everyone wants to sell commercial real estate in major cities and homeowners are more than content to sit tight on 3%-4% rate mortgages. Wells Fargo shut down 13 branches in the space of a week (not coincidentally, Wells Fargo holds more low-interest mortgages than any other bank).

A hard landing appears to be coming for the banking industry and every sector of the economy will feel it to some degree. Yet investors seem to think the banks will weather the storm as their stocks surged even after Moody’s sounded the alarm. Perhaps the market thinks inflation is tamed or that the Fed will lower rates sooner rather than later.

What about the American economy? Moody’s is bearish

Many of us remember Moody’s and all the other credit agencies misreading the tea leaves in 2007. Agencies then gave investors no warning that Lehman Brothers and the like were ticking time bombs sitting on toxic assets about to boil over.

You may have missed the news that Moody’s isn’t bullish on the U.S.’s financial health these days. In mid-November, the agency also downgraded America’s credit rating outlook from stable to negative.

Moody’s analyst Peter Nerby says the negative rating reflects “the potentially weaker capacity of the government … to support the U.S.’s systemically important banks.” Nerby warns the banks face a “significant risk” of deposit flight which would require another enormous infusion of government spending.

Keep in mind: 40 cents of each dollar the government spends is now going toward paying interest on the national debt. Thirty-four trillion in debt and climbing is pretty tough to sugarcoat. And Moody’s for one is calling the situation like it sees it.