Moody’s has downgraded the senior debt and deposit ratings on 12 UK banks and financial institutions, a day after the Bank of England announced a £75 billion injection of new money into the economy.
The rating agency said that the decision was made on the basis that the government now looked less likely to bail out the smaller players in the future, meaning that a key back stop of the industry had been taken away.
“Announcements made, as well as actions already taken by UK authorities, have significantly reduced the predictability of support over the medium to long term,” Moody’s said in a statement on Friday.
RBS and the Nationwide Building Society were cut by two levels from Aa3 to A2, while Lloyds TSB and Santander were downgraded by one notch from Aa3 to A1. The Co-operative Bank was downgraded from A2 to A3.
While there are still concerns about “tail risk” in the loan books of British banks and building societies, the banking sector passed the European Union’s July stress tests, showing that they were sufficiently well capitalised to survive even fairly dramatic default scenarios in the eurozone and economic slowdowns.
Rather than acting as a comment on the financial stability of the banks themselves, the Moody’s downgrade reflects the agency’s belief in the willingness and the ability of the treasury to act to help struggling institutions, as it did in 2008, injecting £850 billion in loans, guarantees and share purchases in 2008 and 2009.
Moody’s now says that while the government may step into support systemically important financial institutions, “It is more likely now to allow smaller institutions to fail if they become financially troubled. The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government.”
The downgrade comes as the European Central Bank indicated further support for banks within the eurozone, extending its covered bond buying programme. Fear in the marketplace that even banks in the European core countries are struggling to maintain high enough capital buffers were raised to new levels this week when the French and Belgian governments were compelled to step in to voice their support for Dexia, the banking group, which is now facing being broken up into its national units.
Dexia, which also passed the European stress tests and received a government bailout in 2008, was considered sufficiently well capitalised in the summer, but fears that its exposure to sovereign debt in Greece, Italy and Spain could be more toxic than originally thought have now overtaken it.