22nd June 2012

Royal Bank of Scotland, HSBC, Barclays and Lloyds were among 15 banks worldwide that were downgraded, including some investment giants such as Goldman Sachs, Credit Suisse and Citigroup, over fears about their financial health because of the eurozone crisis.

But while this could be passed onto high street customers in the form of higher rates on mortgages and loans, choking off any economic recovery, what impact did it have on the market?

The negative news saw markets across the globe slump, with the FTSE 100 falling by 0.9%.

However, if we consider individual bank shares the picture changes – while they were weak yesterday following the report that Moody's was set to downgrade UK banks, they remained relatively resilient on the news.

Mindful Money's economist blogger Shaun Richards says in his post: "Indeed as I type this the worst affected UK bank Barclays (2 notch downgrade) has fallen by 0.5% to 201.15p. Quite a disappointment for the media hype, and in fact less than the 0.9% the overall FTSE 100 has fallen!"

So there was no screaming buy signal for the brave investor with a sudden slump in value.

Why is this so?

The banks were not suffering any more than the wider market as the move by Moody's was widely expected. Banks knew they were to be downgraded, so they got their defences ready.

Shaun says: "Ratings agencies are an example of conceptual failure as they tell you what has happened rather than doing the proper job of giving you a reasoned estimate of what is likely to happen.

"To put it another way they are the sort of people who close the stable door after the horse has bolted! And in this particular instance they are only telling you something which bank share prices have pretty much already adjusted too."

So rather than being a stabilising force warning of events to come their strength appears to be kicking institutions when they're down.

Or could it be simply that crisis fatigue has set in? We've been through a mass of downgrades already, and the headlines shouting about ‘fear' are having less impact. After all, these ratings agencies got it massively wrong in the past with the likes of AIG and Lehman's.

To put it another way, financial markets and many consumers and investors may just be getting tired of feeling bad after years of emotional stress.

The impact of the language of crisis – of which one word has become ‘downgrade' – no longer leaves investors rushing for the exit and feeling green around the gills on the rollercoaster of stock market volatility.

Of course, it's obvious to say that banking is a more risky industry than it was a decade ago. But it remains an essential one, although the major banks are now split into leagues.

So are there any banks that remain in the premier league?

As BBC economist correspondent Robert Peston says: "The most interesting thing about the Moody's analysis is that it, in effect, creates three new categories of global banks, the banking equivalent of the Premier League, the Championship and League One.

"Of our biggest banks, only HSBC is in this Premier League. Barclays is in the Championship and Royal Bank of Scotland is in League One."

So what will be the effect of the downgrades?

They might push up the cost of borrowing for the banks fractionally.

And meanwhile, says Peston, RBS can take small comfort that some very big banks – notably Bank of America Corporation and Citigroup of the US – have lower ratings than it does. Even though Lloyds is not a global bank, it suffered a modest downgrade too.

So investors may be wise to pay little attention to the news, and as Shaun Richards notes: "If we look at the economics of this situation we see a clear case of market failure. Ratings agencies have collectively failed…"


More friom Mindful Money:

Is Finance immoral? – Mindful Money’s response to The Guardian

Happiness and Sustainability – Alternative yardsticks for economic growth

Banking connections – the more there are, the greater the risks

To receive our free daily newsletter sign up here.

The Financialist

Leave a Reply

Your email address will not be published. Required fields are marked *