Chancellor George Osborne has backed the UK banks after Moody’s Investor Services downgraded 12 financial institutions on Friday, saying that the move is a reflection of the government’s attempts to reduce the systemic risks in the banking sector and to prevent itself from being dragged into another bailout.
“One of the reasons that they’re doing this is that they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain, in other words, trying to deal with the too big to fail problem,” he told the BBC.
Moody’s made the decision to downgrade companies, including RBS, Nationwide, Santander, and Lloyds TSB, based on its belief that the UK government was less willing to participate in bailouts.
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.
The government has been trying to push through wide-ranging reforms of major banks in an attempt to limit their exposure to problems in the sector. The government-backed Vickers Report, which released its findings in September, recommended that banks increase their capital buffers and ring fence their retail arms to protect high street customers from investment banking losses. Banks now have until 2019 to fully comply.
Moody’s says that this, and other statements of intent, suggests that while the government may step into support systemically important financial institutions - as it did in 2008 and 2009 - “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.”
Echoing Moody’s statement, which stressed that the downgrade was not reflective of the banks solvency or funding situation, Osborne said that the banking sector was in good health relative to its international peers.
“I’m confident that British banks are well capitalised, they’re liquid, they are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment,” he said.
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. The European Union is now considering further stress tests - a tacit acknowledgement that the original two rounds may have been less than stringent.