Moody’s is concerned about America’s banks. And Italy will be making a withdrawal from its domestic lenders.

Suffice to say financials ran up against adverse headlines on Tuesday. The situation was acute enough to weigh on broader markets, although the drag could ultimately prove fleeting.

Moody’s cited “several sources of strain” for a slew of downgrades across the US banking sector. The rationales mentioned “funding pressures, regulatory capital weaknesses and rising risks associated with commercial real estate exposures.”

None of that’s new, but the ratings action, which covered M&T, Old National, Commerce Bank and Pinnacle Financial, among others, spooked markets. Moody’s also placed a handful of larger institutions, including Truist, US Bancorp and State Street, on review for downgrade, and changed the outlook to negative on a hodgepodge of other lenders including Fifth Third, Regions, Citizens and Capital One.

“Higher interest rates continue to reduce the value of US banks’ fixed rate securities and loans and interest rate risk is not captured well in US bank regulation and thus can create liquidity risks,” Moody’s said. (I wonder what tipped them off?)

They went on to note that although banks can access the Fed backstops and FHLB liquidity, that funding isn’t cheap. Recall that BTFP usage continued to drift higher last week, reaching a record near $106 billion.

Not to put too fine a point on it, but I hinted at this problem last Thursday evening, in my weekly money market fund flows update+, which includes a quick look at BTFP usage. “These are backstop facilities,” I wrote. The emphasis was in the original. “There’s no emergency anymore, so the fact that usage keeps rising, even if slowly, is notable, although there could be an innocuous explanation.”

If there is such an explanation, Moody’s didn’t find it or else didn’t think it was sufficient. “These funding sources require collateral, come at a greater cost than deposits and can have shorter duration than core deposits,” they said, before recapping a key pillar of the bank profitability squeeze thesis which came up a lot in April, following SVB’s failure, but which has since faded from the daily discourse.

“Most US banks are subject to lower regulatory capital requirements than the largest US banks [which] in the current environment, leaves some US banks, especially those with sizable economic losses due to higher interest rates that are not reflected in their regulatory capital ratios, less resilient and more vulnerable to a loss of investor confidence,” the rating agency said. “In addition, given their smaller capital buffers and systemwide deposit pressures, these banks could become significantly more reliant on higher cost deposits and wholesale borrowing in order to avoid the forced sale of fixed rate securities or loans.”

Again: Nothing new, but an unwelcome reminder, and one that had the potential to undermine sentiment. At least for a day. Moody’s also emphasized that “asset risk is rising, in particular for small and midsize banks with large CRE exposures.”

The timing left something to be desired. The downgrades coincided with an announcement from Italy’s Matteo Salvini, who unveiled a tax on Italian banks’ “extra” profits. Another of Giorgia Meloni’s deputies blamed the ECB’s rate hikes.

Italian banks have been at the center of various European financial storms and soap operas. More recently, they’ve benefited from higher rates, and the government probably isn’t enamored with the idea of large shareholder payouts given how many times banks needed assistance to avert calamitous outcomes over the years.

Of course, some of those prospective calamities were associated with poor fiscal management in Rome, which undermined the Italian government bonds on banks’ books. Then there’s the argument that says Italy’s fiscal problems were at least in part a function of a poorly-designed monetary union beholden to Germany. And on and on. If the question is about Italy’s financial woes or fiscal situation, the answer is finger-pointing.

News of the new tax, which analysts suggested could shave as much as 20% from banks’ 2023 profits, weighed on Italian equities. The bank gauge dropped more than 7%, on track for a very bad session. The rout wiped out €10 billion in market cap at one juncture.

Between the Moody’s downgrades, the slump in Italian financials and more lackluster data out of China, you could “goal-seek your ‘bearish risk’ narrative” on Tuesday, as Nomura’s Charlie McElligott put it.