Twelve UK banks downgraded by Moody’s over prospect of less state help

7th October 2011

Meanwhile reports fears among civil servants that one of the twelve, RBS may need a further cash injection if the European Banking Authority re-runs previous stress tests to take into account substantial write-downs of the eurozone  government debt held by the bank.

The Telegraph gives a live blow by blow account of this morning’s events with a full statement about the downgrade on the Moody's website.

The statement said: “Moody's reassessment assumes a decrease in the probability that the UK government would provide future support to financial institutions if needed. This follows ongoing guidance from the UK Tripartite authorities (the Bank of England, the Financial Services Authority and the Treasury) that the government is more likely in the future to make greater use of its resolution tools to allow burden sharing with senior bondholders. “Moody's has lowered the amount of support it incorporates into the institutions' ratings to reflect the overall weakening support environment,” Moody’s senior vice president financial institutions group Elizabeth Rudman added.

The BBC quotes Chancellor George Osborne putting a positive gloss on things. He said: "One of the reasons they're doing this is because they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain.  People ask me how are you going to avoid Britain and the British taxpayer bailing out banks in the future? This government is taking steps to do that.  Therefore credit rating agencies and others will say, well actually these banks have got to show they can pay their way in the world."

However, by of reassurance, he added: "They are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment."

The rating moves include a one-notch downgrade of Lloyds TSB Bank plc (to A1 from Aa3), Santander UK plc (to A1 from Aa3), Co-Operative Bank plc (to A3 from A2), a two-notch downgrade of RBS plc (to A2 from Aa3) and Nationwide Building Society (to A2 from Aa3) and downgrades of seven smaller building societies.

RBS has issued a statement reported here on Bloomberg following the FT report.

The statement said: “The design of any new application of the EU stress tests is completely up in the air. Any analysis of how any bank will be affected is nothing more than speculation. RBS reported an 11.1 percent Core Tier 1 capital ratio as at 30 June 2011, which places us among the strongest capitalized banks in Europe.”

Mulling the downgrade, this morning’s FT Alphaville wrote: “It’s important to stress that Moody’s has not implemented these cuts because it believes there’s been a market deterioration in the financial strength of the banking system or the UK government, but rather because it believes the government has re-evaluated its role in supporting banking institutions.”

The BBC quotes Max King, a portfolio manager at Investec Asset Management, saying "People are getting a little paranoid about the UK banking sector. It doesn't have the same exposure
to sovereign default and devaluation risk as the rest of Europe. It doesn't have exposure to Ireland, but that is a eurozone country which appears to be doing best in the crisis"

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