UK economy: Major banks downgraded as government support wobbles

THE ratings agency Moody’s last night lowered the credit ratings of RBS, Barclays and HSBC banks, raising the spectre of increased costs for consumers.

They were among 15 banks and financial institutions who had their ratings downgraded by the agency, who said the lenders’ long-term prospects for profitability and growth were shrinking. Moody’s said that it was especially concerned about banks with significant capital market activities – heavy trading involvement in wholesale money markets.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” Moody’s global banking managing director Greg Bauer said in the agency’s statement last night.

The other institutions that have been downgraded include Credit Suisse, UBS, BNP Paribas, Credit Agricole, Societe Generale, Deutsche Bank, Royal Bank of Canada, Bank of America and Morgan Stanley.

RBS saw its rating cut from A3 to Baa1, Barclays from A1 to A3 and HSBC from Aa2 to Aa3. The biggest surprise is the three-notch downgrade of Credit Suisse.

Some of the banks were put on negative outlook, which is a warning that they could be downgraded again later, on the basis that governments may eventually withdraw their support. Moody’s recognised “the clear intent of governments around the world to reduce support for creditors”, but said they had not yet put frameworks in place that would allow them to let banks fail.

A downgrade usually means that it becomes more costly for banks to raise money by selling debt, and that investors demand higher interest for riskier debt, which is what the downgrades represent.

The impact on consumers could be more expensive mortgages.

However, it is believed that British banks are comparatively well placed to weather the worst effects of the downgrade on account of the steps already taken to reinforce their balance sheets as a result of the financial crisis of 2008.

Moody’s has already downgraded major banks in several European countries.