(Bloomberg) -- The head of one of the world’s largest asset managers called Moody’s Investors Service’s outlook cut for the US banking system “a terrible overreaction” and said regulators had reassured the market following the collapse of three lenders.

“There were a lot of unique circumstances around the banks in question — both on the asset and liabilities side,” State Street Corp. Chief Executive Officer Ron O’Hanley said in an interview with Bloomberg TV on Wednesday. “I don’t think it’s helpful when rating agencies treat entire sectors the same way.”

Moody’s earlier this week cut its outlook for the US banking system to negative from stable, citing the run on deposits at Silvergate Capital Corp., SVB Financial Group’s Silicon Valley Bank and Signature Bank that led to their collapse. Although federal regulators said that all deposits will be made whole, the rapid decline in confidence “starkly highlight risks in US banks’ asset-liability management,” the agency said. 

The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. took extraordinary measures Sunday to shore up confidence in the financial system after the collapse of Silicon Valley Bank, introducing a new backstop for banks that Fed officials said was big enough to protect the entire nation’s deposits.

“Regulators were in a very difficult spot,” O’Hanley said. “On the one hand I don’t believe SVB by itself was a systemic risk to the system, but on the other hand there was clearly contagion going on. I think regulators needed to provided some reassurance to the market and they’ve done that with the facility. This is all about faith and trust.” 

Rate Challenge

Speaking on a panel at the Saudi Financial Sector Conference later Wednesday, O’Hanley said that he expects the Federal Reserve is weighing the need for more rate hikes versus a pause.

“It’s a real challenge for the Fed because the data in the US shows that you have continued inflation. It’s abating but it’s still growing,” he said. “Then you’ve got a labor market that’s very, very strong and it’s hard to see the risk — right now — of a recession when you have full employment. I think the Fed therefore probably believes that it needs to do more.”

While O’Hanley thinks the Fed may push ahead with its planned rate hikes, he said it may still not have decided. 

“It’s very challenging at this point,” he said. “I suspect they’ll make a decision on that day.”

(Updates with comments on possible rate hike.)

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