Moody's just cut its outlook on the entire US banking system to negative in the wake of SVB's collapse

• Moody's downgraded its outlook on the entire US banking system on Tuesday.
• The revised rating reflects the environment that sparked bank runs at Silicon Valley Bank, Signature Bank, and Silvergate Bank.

Moody's downgraded its outlook for the US banking system on Tuesday, citing the rapid deterioration of the landscape thanks to bank runs and subsequent collapse of Silicon Valley Bank, Signature Bank, and Silvergate Bank.

The rating agency changed its outlook on the sector to negative from stable, noting that "operating conditions have sharply deteriorated."

"Pandemic-related fiscal stimulus along with more than a decade of ultralow interest rates and quantitative easing resulted in significant excess deposit creation in the US banking sector," the note reads. "This has given rise to asset-liability management challenges, with some banks having invested excess deposits in longer-dated fixed-income securities that have lost value during the rapid rise in US interest rates."

The ratings cut comes two days after the Federal Reserve, Treasury, and FDIC announced that all depositors of SVB and Signature Bank would be made whole, and that they would create a new backstop mechanism, The Bank Term Funding Program, to help deposit-taking banks to meet their funding needs and keep customer money secure.

According to Moody's, the move isn't enough to prevent the substantial decline in Americans' confidence in US banks.

The rating agency's analyst say that the high-interest-rate environment created by the Fed exacerbates challenges facing banks. Funding and liquidity will be harder to come by, and will ultimately leave banks in worse shape compared to the years of easy monetary policy and low rates.

"[B]anks with substantial unrealized securities losses and with non-retail and uninsured US depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings and capital," Moody's strategists led by Donald Robertson wrote Tuesday.

They also pointed out that US banks now face sharply rising deposit costs, which will be a drag on earnings going forward.

Should the Fed opt for more policy tightening, which Moody's expects, those profitability snags could deepen.

"Our base case is for the Fed's monetary tightening to continue, which could deepen some banks' challenges. Further drivers of the outlook are detailed in the overview table and bullets that follow," the strategists said.

Moody's median rating on US banks is now a3, or three notches higher than the global median of baa3.