Moody’s Investors Service says that although it is facing pressure from deteriorating asset quality, the overall outlook for the credit health and financial strength of the U.S. banking system is stable.

Moody’s says in its annual outlook for the U.S. banking industry that the healthy profitability and prudent liquidity at both the bank and bank holding company levels is keeping the industry stable. “There will of course be selective downgrades over time,” says Gregory Bauer, a Moody’s managing director, “but we sincerely doubt that there will be a repositioning of the industry ratings profile such as there was in the 1980s.”

Moody’s average senior debt rating for major U.S. bank holding companies is A1, while the bank financial strength ratings for the system range from A (superior) to B- (strong). Bauer believes that the major holding companies are well positioned to deal with the danger of eroding asset quality because their earnings are very strong.

“The softening economy admittedly has been affecting earnings,” Bauer says, “but if the earnings levels remain basically intact, the banking industry’s coverage for any reasonable loss scenarios remains considerable. We expect that the positive gap between earnings and provisioning costs will remain wide, providing strong protection for depositors and bondholders.”

“The U.S. system sits on roughly US$100 billion of equity, as well as US$50 billion of loan loss reserves, which exceeds the present total of bad loans by approximately US$17 billion,” he explains.