Credit ratings agency Moody’s yesterday downgraded Britain’s part-nationalized banks Lloyds and Royal Bank of Scotland (RBS), although the chancellor of the exchequer said UK banks were well-placed to cope with a European debt crisis.
The cuts to RBS and Lloyds formed part of a broader downgrade of 12 British financial companies by Moody’s, which had already been flagged by the agency earlier in the year.
Moody’s cut RBS by two notches to “A2” from “Aa3” and downgraded Lloyds TSB by one notch to “A1” from “Aa3.” It also cut its ratings on Santander UK, the Co-Operative Bank, Nationwide Building Society and seven other smaller British building societies.
Moody’s did not change its rating on Barclays and HSBC, which along with RBS and Lloyds represent the “Big Four” group of lenders that dominate British banking.
“Moody’s believes that the government is likely to continue to provide some level of support to systemically important financial institutions, which continue to -incorporate up to three notches of uplift,” it said in a statement.
“However, it is more likely now to allow smaller institutions to fail if they become financially troubled. The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government,” it added.
“The downgrades have been well flagged, reflecting removal of government support through guaranteed liquidity schemes and low probability of future taxpayer bail-outs,” Oriel Securities said in a research note.
Europe’s sovereign debt crisis, sparked by Greece’s economic woes, has led to concerns that many banks will need further injections of capital.
Earlier this week, France and Belgium intervened to prop up European bank Dexia, whose financial strength had been eroded by the sovereign debt turmoil.
However, British Chancellor of the Exchequer Geroge Osborne said Britain’s banks remained well--capitalized and in better shape than many of their European rivals, who face bigger losses on writedowns of their holdings of Greek government debt.
In an interview with BBC radio, Osborne also said that the Bank of England’s decision to pump more money into the economy and the government’s deficit reduction plans would help shield Britain from the eurozone debt crisis.
“People ask me ‘how are you going to avoid Britain and the British taxpayer bailing out banks in the future?’” Osborne said. “This government is taking steps to do that, and therefore credit rating agencies and others will say ‘well, actually these banks have got to show that they can pay their way in the world.’”
“And I am confident that British banks are well capitalized, they are liquid, they aren’t experiencing the kind of problems that some of the banks in the eurozone are experiencing at the moment,” he said.
Lloyds said the Moody’s downgrade would only have a “minimal” impact on its funding costs, while RBS reiterated that it remained strongly capitalized and had strengthened its credit profile.
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