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UK banks hit by downgraded credit ratings

12 banks and building societies less likely to recieve support from the government during financial

Moody's has downgraded the credit rating of 12 UK financial firms, including Lloyds TSB, RBS, Nationwide and Santander UK. Shares in both RBS and Lloyds were down by about 3.5% in morning trading.

Moody's said that the government are now less likely to support some of the firms if they got in to financial trouble, including the complete removal of "systemic supoort for seven smaller institutions."

The Chancellor, George Osborne, said one reason for the downgrades was that the government was seen to be "trying to deal with the too-big-to-fail problem".

"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" said the chancellor.

But Osborne said that he still had confidence in British banks. "They are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment."

However, the firm emphasised that the downgrades did not "reflect a deterioration in the financial strength of the banking system".

Moody's applied three catorgaries of downgrade to the financial firms.

Those banks with a "high likelihood" of support from the government, inlcuding RBS and Llyods; those banks or building societies with a "moderate" likelihood of support, such as Nationwide; and institutions with a "low or no" likelihood of support. This category included several building societies, such as Norwich & Peterborough, Nottingham, Principality, Skipton and Yorkshire.

The Building Societies Association called the downgrade a "normalisation" that had "been expected for some time. It does not represent any change in financial strength and it is business as usual across the sector."

RBS said it was "disappointed" that Moody's announcement did not reflect the "significant progress" the bank had made to restructure it finances.

"We do, however, see the removal of implicit government support for the UK banking sector as being a necessary and important step forward as the sector returns to standalone strength," RBS said in a statement.

Nationwide said that Moody's announcement was part of an industry-wide review, and "not a reflection of Nationwide's business model. Nationwide remains one of the strongest and best capitalised financial organisations in the UK".

But analysts have said that we shouldn't over-react to the downgrades, and that people are getting paranoid about UK banking.

"It doesn't have the same exposure to sovereign default and devaluation risk as the rest of Europe. It does have exposure to Ireland, but that is a eurozone country which appears to be doing best in the crisis," said Max King, a portfolio manager at Investec Assest Management.