U.S. Selective Default Will Likely Result in U.S. Financial Institution Rating Downgrades

Banking Organizations, Insurance Organizations, Non-Bank Financial Institutions

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This commentary discusses the potential impact the failure of raising the U.S. debt ceiling would have on U.S. financial institutions, but with a focus on banks, a sector that was already under pressure prior to the debt ceiling debate.

Key highlights include:

• Failure to lift the debt ceiling before or close to the X-date, will likely result in U.S. financial institution rating downgrades.

• In the short-term, such a scenario would likely lead to a number of negative rating actions. However, the longer Congress fails to reach a deal, adverse rating actions would likely accelerate and be broader based.

• Prior to this, banks were already pulling back on lending and tightening underwriting standards. Failure of a deal would amplify the pullback making it harder for consumers and businesses to get credit, hurting the economy further.

“Following the failures of three U.S. banks in March and April, the banking sector has already been under pressure due to a variety of market concerns, including lower yielding fixed rate assets on balance sheets that could cause large losses if banks are forced to sell, future asset quality deterioration particularly in commercial real estate, higher funding costs and weaker loan growth, all of which will pressure future profitability. These concerns would be heightened significantly, if a debt deal does not materialize quickly,” said Michael Driscoll, Managing Director - Head of NA FIG.