Here's what analysts are saying about the downgrade and the risks to the banking sector:

BRIAN MULBERRY, PORTFOLIO MANAGER AT ZACKS INVESTMENT MANAGEMENT

"The high interest rate environment will persist longer than what the market has priced in, which makes risks for financial firms higher, so the rating downgrade is not a surprise to us, and we are surprised with the market's overreaction to it.

"However, the timing of the rating action is a bit unexpected as nothing has materially changed in the last few months. The stress in the system hasn't changed and we understand that the profitability is going to remain under pressure, but we do not believe that there is a high risk of bank failures or the environment is similar to what it was before the global financial crisis of 2008."

MIKE SANDERS, HEAD OF FIXED INCOME & PORTFOLIO MANAGER AT MADISON INVESTMENTS

"The banks that had gotten into trouble in the first quarter 2023 had unique business models and were not similar to most of the banks that have seen a rating action. So we think that the risks that these banks are facing is more manageable and we are not very concerned."

MACRAE SYKES, PORTFOLIO MANAGER, GABELLI FUNDS

"This (the rating downgrade) is just another reminder that there are still challenges in the regional banking space. High exposure to commercial real estate, rising deposit and funding cost are some of the key concerns that the banks are facing."

LIZ ANN SONDERS, CHIEF INVESTMENT STRATEGIST AT CHARLES SCHWAB

"Additional risk-off sentiment surrounding the banking sector could tip the scales more toward recession in the recession-versus-soft landing debate."

KATHY JONES, CHIEF FIXED INCOME STRATEGIST AT CHARLES SCHWAB

"As banks tighten lending standards and try to shore up their capital, there is less money flowing to the economy. Credit is the lifeblood of small and medium-sized businesses, so reducing the availability could contribute to a downturn."

CHRISTOPHER WOLFE, HEAD OF NORTH AMERICAN BANKS AT FITCH RATINGS

"We have a deteriorating outlook on banks and it is proving to be a much tougher environment for the banking industry than it has been over the past few years. We did lower, what we call as the operating environments for the U.S, banks in June from AA to AA-. That didn't translate into any rating changes, but that reduces the amount of rating headroom for banks in the U.S."

MICHAEL GREEN, CHIEF INVESTMENT STRATEGIST AT SIMPLIFY ASSET MANAGEMENT

"Moody's is recognizing its cost of funding for banks has risen dramatically. There is a recognition that unless U.S. banks start sharing some of the wealth from higher interest rates with their depositors, they're going to see money continue to flow out.

"While we've seen them stabilize, the cost of funding has risen significantly. That's kind of the core of the Moody's component."

JOE SCOTT, HEAD OF THE FINANCIAL INSTITUTIONS GROUP AT RATING AGENCY KBRA

"We believe most KBRA-rated banks will be able to navigate the current uncertainties with their ratings unchanged. The vast majority of KBRA's rated community and regional banks continue to have Stable Rating Outlooks. KBRA strives to produce durable 'through the cycle' ratings that encompass the ability of banks to manage through more difficult economic environments."

(Reporting by Nupur Anand, Davide Barbuscia, Carolina Mandl in New York; Editing by)

By Nupur Anand