Moody’s threatens to downgrade 14 UK banks

Ratings agency Moody’s is threatening to cut the ratings of 14 British lenders including RBS and Lloyds on concerns regulators including the Bank of England will harden their stance on future bailouts.

In a statement released today, Moody’s said it had assessed 18 financial institutions in the UK which are receiving government support, and of these 14 face a downgrade because it believes UK regulators “do not currently have all the tools necessary to resolve such institutions without causing financial instability.”

In a review period which will last three months, the ratings agency will consider how the Treasury, the Bank of England, and the FSA would deal with the future failure of an institution, the “political acceptability” of further support from taxpayers, and the UK government’s ability to absorb further liabilities.

Moody’s has downgraded the Aa3 senior debt and deposit ratings of Barclays from stable to negative, while affirming a negative outlook for HSBC’s Aa2 senior debt and deposit ratings.

Moody’s said this reflects “the publicly stated intention of UK regulators to improve their resolution powers for large, systemic institutions by allowing for burden-sharing with senior debt holders.”

“The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the government.

“It has been initiated in response to ongoing guidance from the UK authorities that banks that fail in the future should not expect capital injections from the public purse,” said Elisabeth Rudman, senior credit officer.

“While we note – and will take into consideration – the technical difficulties in resolving larger, complex banks, we will also need to assess the likelihood of further developments in this area over the medium term, given the very clear determination of the UK government to put in place a resolution mechanism that can also be applied to large, complex banks.”

There was a mixed response from bank shares this morning, with HSBC up 0.43% to 629.4p, while Barclays fell 0.62% to 266.6p. Royal Bank of Scotland slid 0.27% to 40.78p, and Lloyds was 1% lower at 50.36p.

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