In a recent interview, an analyst from Fitch Ratings expressed significant concerns regarding the current state of the United States banking sectorThe analyst warned that the industry is on the brink of a new wave of turmoil, predicting that Fitch may soon downgrade the ratings of several prominent banks, including titans like JPMorgan Chase and Bank of America.

Chris Wolfe, a former analyst at the New York Federal Reserve, highlighted that his firm had already downgraded the operational environment rating of U.Sbanks from AA to AA- back in June without attracting much market attentionThis downgrade is a stark signal of the challenges that banks are facing in the current macroeconomic landscape.

Wolfe stated, "Should Fitch choose to further downgrade the U.S

banking sector to an A+ rating, it would compel them to reassess the ratings of over 70 banks under their coverageIf this occurs, ratings for major players like Bank of America and JPMorgan would likely plummet to A+ as well, since no bank can hold a higher rating than its operational environment." This potential downgrade isn't just an isolated incident but a reflection of a broader systemic risk looming over the entire sector.

Fitch Ratings currently evaluates several U.Sbanks with varying ratings, hinting at an evolving landscape that could drastically change depending on future decisions and economic conditions.

Wolfe expressed that Fitch aims to signal the market regarding the risks surrounding potential downgrades

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If top-tier banks such as JPMorgan see their ratings fall, it could force Fitch to reassess ratings for all similar institutions, potentially pushing many smaller banks into non-investment grade territory.

The reasoning behind Fitch's concerns regarding the operational environment of U.Sbanks can be summed up in one key term: structural challenges.

Specifically, these challenges include: (1) The mid-term fiscal and debt outlook in the U.S., exacerbated by extreme partisan battles(2) The recent collapses of three major banks have exposed critical weaknesses in the regulatory framework, revealing that many banks have not adequately addressed significant asset/liability mismatches and vulnerabilities related to concentrated or unstable deposits.

(3) Anticipated changes to regulations that may affect the competitiveness of non-GSIB (Global Systemically Important Banks) lenders and reduce their profitability

(4) The high interest rates provided by reverse repos (RRP), which have contributed to an outflow of deposits from banks into money market funds.

The downgrade in the operational environment for the banking sector reflects an increasingly uncertain macroeconomic landscapeIf high interest rates persist, the U.Sbanking system may continue to face ongoing structural challenges, including the lasting consequences of unprecedented stimulus measures implemented during the pandemic, prolonged high inflation rates, and the Federal Reserve's actions to tighten monetary policy.

Recent analyses conducted during our mid-year conference and critical discussions around the European and American banking crises have provided a thorough understanding of the issues confronting the U.S

banking environmentWe have creatively developed a financial early warning defense system tailored to identify emerging banking crises across various timelines.

According to Morgan Stanley analysts, banks that face rating downgrades will see their costs of issuing bonds rise, thereby further squeezing their profit marginsThere are genuine concerns that some banks could become completely shut out of the bond market.

What factors could potentially drive Fitch to downgrade bank ratings? A key player here is the Federal Reserve's monetary policy decisions.

Wolfe highlighted, "We are uncertain regarding when the Fed will end its rate hike cycle, which remains an extremely important variable for the banking system." This uncertainty can create wild swings in confidence among investors and depositors alike, potentially leading to unstable economic conditions.

He emphasized that in a rising rate environment, the default rates on bank loans typically increase, possibly surpassing historically normal loss levels, compounding the difficulties facing the banking industry