Falling credit ratings at UK financial firms

Moody’s said it believed that the UK government would be less likely to support some of its banks if they needed a bailout.

But said that the downgrades did not “reflect a deterioration in the financial strength of the banking system or that of the government”.

Santander UK, Co-operative Bank, Nationwide and seven smaller building societies also saw their credit ratings slashed by Moody’s.

The move triggered a fall in banking shares on the London Stock Exchange and could increase the cost of borrowing for the affected financial institutions.

In a statement, the credit agency said it expected the government to continue to provide some level of support to larger banks and “systemically important financial institutions, which continue to incorporate up to three notches of uplift.

“However, it is more likely now to allow smaller institutions to fail if they become financially troubled,” it added.

I’m confident that British banks are well capitalised – they are liquid. George Osborne

The downgrade reflects the government’s long term policy shift away from the possibility of bailing out the banks, and transferring risk from taxpayers to creditors. Moody’s said it was partly as a result of the government’s removal of support for the seven small institutions, which include the Norwich and Peterborough, Principality and Yorkshire building societies.

“Moody’s has lowered the amount of support it incorporates into the institutions’ ratings to reflect the overall weakening support environment,” said Elisabeth Rudman, senior vice president of the financial institutions group at Moody’s.

Downgrade Q&A: Economics Editor Faisal Islam explains what it all means

Impact on the banks

Responding to the downgrade, RBS said it was “disappointed” that its progress since 2008 had not been acknowledged. Lloyds said the Moody’s downgrade would only have a “minimal” impact on its funding costs.

A Lloyds spokesman said that it was important to note that the stand-alone rating and short-term ratings for the bank remain unchanged. “We believe this change will have minimal impact on our funding costs,” he added.

The Independent Commission on Banking, led by Sir John Vickers, recommended that the government ring-fence retail banks and make creditors responsible for any losses, rather than taxpayers. This is intended to reduce the potential risk to taxpayers, meaning that banks’ creditors would have to support banks, rather than relying on a government bailout.

Chancellor George Osborne said that the downgrade was a response to the government’s move away from guaranteeing Britain’s biggest banks and what he called the “too big to fail” problem.

“People ask me, how are you going to avoid Britain and the British taxpayer bailing out British banks in the future?,” he told the BBC. “This government is taking steps to do that. Therefore, credit rating agencies and others will say; ‘actually, these banks will have to show that they can pay their way in the world’.

“I’m confident that British banks are well capitalised – they are liquid, they are not experiencing the same problems that some of the banks in the Eurozone are experiencing at the moment.”

Italy and Spain downgraded

It comes as Italy and Spain suffer credit downgrades from the Fitch agency as the eurozone debt crisis worsens.

Italy’s sovereign rating has gone down to A+ from AA- while Spain’s has been cut to AA- from AA+.

“Of greater concern to Fitch is the small but no longer negligible tail risk that a further worsening of the eurozone debt crisis and volatility in the value of Italian government bonds will further erode confidence in the banking system,” Fitch said in a statement.

“In such a scenario, concerns about the banks would start to weigh on the sovereign credit profile and a vicious cycle of deteriorating sovereign and bank credit quality could emerge.”