Dodd-Frank forces banks to concentrate in commercial loans, commercial real estate and US treasuries.
Fed cuts short-term rate to zero, keeps it there for year so banks (all of them, but SVB most notably) concentrate their bond portfolio on long-term bonds
2022-2023 Fed raises rates, obliterating the “sell-today” value of long term bonds
Moody’s waits to see the effects of bank bailout, back-stopping depositers etc. and this morning . . . . announced its net findings in the form of a credit downgrade for banks generally
There is little/no reason to believe today’s slide is caused by some sudden event. (The stock market is down 1% but the economy did not get 1% worse last night.)
Rather Moody’s is beginning to asses, in the form of credit ratings, a number of long term historical trends.
Investments can generally be categorized as
cyclical (like high-end consumer products)
non-cyclical (consumer staples)
Used to be only a little cyclical but are now very cyclical (like real estate and government bonds)
It is impressive (important??) when an investment category used to be non-cyclical but now is cyclical.
For various reasons (including Dodd-Frank) banks are heavily invested in the third category. Hypothetically banks could invest heavily in pet food stocks, tobacco stocks and other non-cyclicals, but they are not.
Until recently, that fact has not mattered. But it is beginning to matter. Today, with the Moody’s announcement one more piece of straw was added to the camel’s back.
