RBS among 12 UK financial institutions downgraded by Moody's
Ratings agency says the UK government is likely to continue to support "systemically-important" financial institutions, however it will be more inclined to let smaller institutions fail, and pointed to an overall weakening support environment.
Moody's has downgraded the senior debt and deposit ratings of 12 UK financial institutions, particularly smaller institutions which it believes the authorities will be more inclined to let them fail if they run into financial trouble.
Santander and Lloyds TSB were downgraded a notch, and Royal Bank of Scotland (RBS) is in the firing line again with Moody's downgrading it two notches. Moody's said large clearing banks like RBS alongside banks like HSBC and Barclays, had a "very high likelihood" of support from the authorities.
Moody's believes 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 reduced the notches of support uplift to three from four for Lloyds; and to three from five for RBS. However, it says that there is insufficient certainty regarding the assistance provided to smaller institutions like building societies if they run into trouble.
Moody's stated that the government was more likely in the future to make greater use of its "resolution tools" to allow burden sharing with senior bondholders. "Therefore, Moody's has lowered the amount of support it incorporates into the institutions' ratings to reflect the overall weakening support environment," said Elisabeth Rudman, senior vice president, Financial Institutions Group, Moody's .
In its Q2 results, RBS announced a GBP 733 million provision for writedowns related to Greek government bonds. It has a core Tier 1 capital ratio of 11.1% and in Q2 it stated that its gross risk-weighted assets were GBP 9 billion lower than the previous quarter. (See the Trefis chart below for a breakdown of the businesses that make up RBS's stock price.)
Although the Bank of England, the Financial Services Authority and the Treasury have indicated that banks cannot rely on the taxpayer to bail them out going forward, Moody's says the authorities are still likely to support large and medium-sized institutions as steps for resolving failed banks without having to dip into government coffers, are far from finalised.
Despite the FSA's publication in August of a consultation paper on Recovery and Resolution Plans (RRPs) and the Independent Commission on Banking's proposal to ringfence certain parts of a bank's operations to "aid resolution" of any problems, Moody's said it recognised that the authorities did yet have all the necessary tools to effect the orderly resolution particularly of the largest, most complex banks, and that many of the measures being considered (RRPs, ringfencing) could take years to implement.
Date Posted:7th October 2011