Tuesday, May 24, 2011

No more bailouts put UK's biggest banks in danger of ratings downgrades

Ratings agency Moody's put Lloyds TSB, Royal Bank of Scotland and Santander UK on review for possible credit rating downgrades, saying that there will be no taxpayer-funded bailouts in the future.

The three are the most high-profile of fourteen banks and building societies put under review by the agency. The review relates to the financial institutions' senior debt and deposit ratings.

"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 (the Bank of England, the Financial Services Authority and the Treasury) that banks that fail in the future should not expect capital injections from the public purse," said Elisabeth Rudman, a Moody's senior credit officer and bank analyst.

The move by Moody's could lead to a hike in the banks' borrowing costs. The review process will take three months.

The banks and building societies covered by the review are: Bank of Ireland; Co-operative Bank; Coventry Building Society; Lloyds TSB; Nationwide Building Society; Newcastle Building Society; Norwich & Peterborough Building Society; Nottingham Building Society; Principality Building Society; Royal Bank of Scotland; Santander UK; Skipton Building Society; West Bromwich Building Society; and Yorkshire Building Society.

The move follows an announcement from Moody's last month that it would reassess the levels of systemic support incorporated in the senior debt ratings of UK financial institutions.

Moody's will conduct a full review of the levels of government support available, and any other mitigating factors that could obviate the need for a downgrade.

It said that it was reviewing the situation because the current long-term ratings on banks involved levels of government support "that the rating agency may now deem to be too high for the evolving post-crisis environment".

Moody's said: "The authorities have taken a number of legislative and other steps to permit losses to be imposed on creditors as part of the going-concern resolution of banks. 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," Rudman said.

Government support accounts for an uplift of two to five notches for the big banks, and one to five for the smaller institutions.

"Moody's expects to retain a high level of systemic support uplift in the senior debt ratings of the major UK banks, as the rating agency believes that the regulators do not currently have all the tools necessary to resolve such institutions without causing financial instability," it said.

The announcement also said that Barclays has been changed to negative from stable, and that HSBC's rating has been affirmed with a negative outlook.

Barclays and HSBC are not under review but have suffered a hit, Moody's said, because the government has publicly stated it believes senior debt holders should share the pain if the banks get into trouble.