After Moody’s downgrades, regional bank technology had to argue in unit costs
Moody’s August 2023 rating actions confirmed that the spring’s bank stress would become a lasting earnings squeeze. Regional bank technology budgets had to be defended in the CFO’s terms: cost per account, faster liquidity data, and vendor contracts priced for a smaller margin.
Looking Back revisits one week at a time, from January 2020 to today, and asks what it meant for the banks, health systems and public agencies we serve. The series was written in 2026, with the benefit of hindsight, and each article says which week it looks back on.
The week
On August 7, 2023, Moody’s Investors Service downgraded the credit ratings of ten small and midsize U.S. banks and placed six larger banks on review for possible downgrade, while changing the outlook on others to negative. Moody’s pointed to higher funding costs as deposits moved to higher-yielding alternatives, pressure on profitability, unrealized losses on securities as rates rose, and exposure to commercial real estate, particularly offices. The action came five months after the failures of Silicon Valley Bank and Signature Bank and three months after First Republic’s. S&P Global Ratings downgraded several regional banks later in August. In late July, the federal banking agencies had updated their liquidity guidance to stress contingency funding plans and readiness to borrow from the Federal Reserve’s discount window.
The bank failures of March 2023 were a liquidity crisis. Moody’s August actions described something slower. Funding costs were rising, net interest margins were narrowing, and loan books carried commercial real estate exposure that would take years to resolve. For regional and community bank technology leaders, that meant a different budget conversation. Projects justified by growth or customer experience alone became harder to fund. Projects that lowered cost per account, or gave treasury faster sight of deposits and liquidity, moved up. We look at three parts of that shift: the cost case, the liquidity data case, and the vendor contracts that sit under both.
The cost case
A bank’s technology spending is mostly run cost: core processing, card processing, digital banking platforms, network and data center, and the staff who operate them. Change projects are the smaller share. In a margin squeeze, the CFO asks first about run cost, and asks it in units. What does it cost to maintain a checking account for a year? What does each digital login, each wire, each loan booked cost in technology and operations?
Few regional banks could answer precisely in 2023. Costs sat in general ledger lines by vendor and department, not by product or transaction. Building a unit cost model takes allocation work: mapping contracts and staff to the products they support, then dividing by volumes. It is not glamorous, but it changes the conversation with the board. A technology leader who can show that digital account opening costs a fraction of branch opening per account can defend that investment in a cost-cutting year. One who presents a project list cannot.
The model also exposes waste. Duplicate applications from past acquisitions, unused software licenses and per-account fees on dormant accounts all show up once costs are tied to volumes. Retiring them funds part of the investment the bank still needs.
The model has a trade-off worth naming. Unit costs favor scale and automation, so they can understate the value of relationship services that drive deposits, such as treasury management for business clients. A good model separates cost to serve from value of the relationship, and leaves the final call to the business line rather than the cost spreadsheet.
The liquidity data case
Silicon Valley Bank lost a large share of its deposits in a day. Supervisors and boards drew a technical conclusion: banks needed to see deposit flows, concentrations and available collateral far faster than monthly or even daily reports allowed. The agencies’ July 2023 liquidity guidance pointed in the same direction, stressing tested contingency funding plans and operational readiness to use the discount window.
Several capabilities follow. Treasury needs intraday views of deposit balances and outflows by segment, including uninsured and concentrated relationships. It needs collateral already positioned and documented with the Federal Reserve, so that borrowing is a matter of hours rather than days. It needs scenario tools that model outflows under stress. Each depends on data from core systems that were built for posting, not for real-time analysis.
These projects were easier to fund in 2023 because examiners and rating agencies were asking about them. They still needed a clear scope. A bank does not need a real-time data platform for every purpose. It needs reliable, frequent feeds of a defined set of liquidity data, an owner in treasury, and a test of the contingency funding plan that shows the data arrives when needed.
Ownership matters here because the data crosses functions. Deposit data comes from the core and digital channels, collateral data from the investment portfolio and loan systems, and the decisions sit with treasury and the asset-liability committee. A named data owner for each feed, with a defined refresh frequency and quality checks, keeps the project from becoming an open-ended platform build.
The vendor contracts
Most of a regional bank’s technology cost sits in a small number of long contracts, above all with its core processor. Those contracts typically run five to seven years, price per account or per transaction, and carry significant termination fees. Banks often signed them in a different rate environment, with growth assumptions that no longer held.
The squeeze changed the negotiating stance. Banks had reasons to revisit pricing tiers, minimum volume commitments and charges for data access and integration. They had reason to ask for rights they had previously traded away: access to their own data in usable formats, the ability to connect third-party applications without punitive fees, and service levels with real credits. The practical approach was to start renewal planning two or three years before expiry, benchmark pricing, and keep a credible alternative in view even if switching was unlikely.
There is a limit to what renegotiation achieves. Core conversions are expensive and risky, and processors know it. Many banks gained more by consolidating smaller contracts, retiring overlapping tools and tightening governance of new purchases than by fighting the largest vendor. A rule that every new technology purchase must show its effect on unit cost, or on a named regulatory requirement, is a cheap and effective filter.
Across all three parts, the skill that mattered was translation. Technology leaders who could express their portfolio in the language of margin, liquidity and risk kept their budgets. Those who presented roadmaps lost them to those who did.
With hindsight
The wave of failures many feared in mid-2023 did not arrive, though pressure persisted. New York Community Bancorp’s large loss and dividend cut in early 2024, driven largely by commercial real estate, and the failure of Republic First Bank in April 2024 showed the squeeze had not ended. The Federal Reserve began cutting interest rates in September 2024, which eased funding costs gradually. The changes in technology spending lasted longer than the crisis. Contingency funding plans and discount window readiness stayed on supervisory agendas. The three cases described here, unit cost, liquidity data and vendor terms, remained the practical way for a regional bank technology leader to argue for budget while margins were thin.