Moody’s Goes After British Banks

Published on Monday, 09 January 2012 19:17

BrianTFN

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British banks had a bad day in the office as Moody’s investor’s ratings cut the debt and deposit grades of 12 banks; a list includes heavyweights like Lloyds and the Royal Bank of Scotland (RBS). Moody’s cited the reason that governmental support for these banks has declined and there is very less likelihood that the government will jump in and rescue in the event of a collapse.

Even among these banks, Lloyds, Santander and the Co-operative bank got the better deal as their ratings were slashed by only one level, RBS and Nationwide Building Society suffered double cuts. Lloyds Bank and Santander were demoted from Aa3 to A1, Co-operative Bank went from A2 to A3 while RBS and Nationwide Building Society had theirs reduced from Aa3 to A2, two stages below.

In the past few months, Prime Minister David Cameron’s government has removed systematic support for seven of these twelve banks, the smaller ones at that. The remaining five banks, the major players of the banking sector in Britain, had their own systematic support reduced by one to three levels.

The Bank of England (BoE), the Financial Services Authority and the Treasury of Britain all have given the notice that any bank that fails in the future should not any bailout funded by taxpayer money. Last month only the government backed Independent Commission on Banking published a report that states that credit risk for bondholders in the longer-term is high as newer arrangements, like ring- fencing, may be brought in so as to help resolve the problems and in such a case the senior bondholders will share a part of the bank’s failure. In 2008, Lloyds and RBS were bailed out using taxpayer’s money.

According to the chancellor’s Exchequer, the rating cut was very much expected and that they have no qualms regarding the same. In report given by the Vickers’s commission, it was advised to separate the retail and investment banks. He said that the government is pursuing the right path and is trying to overhaul the entire industry. It is also taking the necessary steps in order to avoid a situation where a bailout will be required, but in case that does happen, then the banks themselves have to ‘learn to pay their way in the world.’

The banks themselves are questioning the validity of the downgrades. Moody’s in retaliation replied that these banks, especially Lloyds and RBS, had received upgrades over the past three years which were due to the taxpayer bailout, if not for that these banks would have collapsed long ago.