Wall street sign in New York with American flags and New York Stock Exchange background.

Citing the impact of tighter financial conditions, banking-sector strains and the risks posed by commercial real estate, Moody’s Investors Service downgraded its ratings on a number of mid-sized U.S. banks.

Financial reports for the second quarter revealed the impact of rising funding costs on bank profits, Moody’s said, which will continue to lower banks’ profitability and weaken their ability to generate capital internally.

The rating agency downgraded its ratings on 10 banks, including M&T Bank, Pinnacle Financial Partners and Commerce Bancshares. It also placed the ratings of six others under review for possible downgrade, including U.S. Bancorp, State Street, Northern Trust and Bank of New York Mellon Corp.

“Some banks have reduced loan growth, which preserves capital but also slows the shift in their loan mix toward higher yielding assets, even as their funding costs rise, which weighs on profitability,” Moody’s noted.

At the same time, higher interest rates continue to weigh on the value of banks’ fixed-rate securities and loans, it said, which continue to pose liquidity risks.

The mid-sized U.S. banks generally face lower capital requirements than the big U.S. banks, Moody’s said.

“In the current environment, this leaves some U.S. 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,” it said.

Finally, the rating agency said that small- and mid-sized banks are more exposed to the risks in the commercial real estate sector, which are elevated due to a slowing economy, weaker demand for office space and higher interest rates.

“These forces are likely to result in deteriorating loan asset quality in certain commercial real estate sectors, further pressuring the credit profiles of banks with more significant exposures to those sectors,” it said.