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Outlook remains negative for US banking industry, Moody’s says

By Jim Puzzanghera, Los Angeles Times –

WASHINGTON — While the majority of banks have improved their finances during the past four years, looming economic threats mean the outlook for the industry remains negative in the next 12 to 18 months, Moody’s Investors Service said Tuesday.

“Our negative outlook … reflects a challenging domestic operating environment, with prolonged low interest rates, high unemployment, weak economic growth and fiscal policy uncertainties,” said Sean Jones, Moody’s senior vice president.

“Additionally, the threat of contagion stemming from the European sovereign debt crisis undermines economic recovery in the U.S. and exposes banks to a heightened risk of shocks,” he said.

The potential economic problems facing the industry, including large tax increases and government spending cuts known as the fiscal cliff that are set to kick in early next year, trump the improvement in individual bank credit ratings, Moody’s said in its report.

The financial crisis had led Moody’s to drop the median U.S. bank credit rating two notches to A3/Prime-2 from A1/Prime-1.

But during the past 2 1/2 years, the outlook for the majority of banks had been upgraded to stable from negative because of their accrual of higher capital reserves to cover potential losses.

Still, banks remain in a recovery mode, and the “clear threats to the economy” mean the outlook for the industry remains negative.

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