Moodys has downgraded 12 UK financial institutions, including Lloyds and RBS, which received one and two-notch downgrades, respectively.
Santander UK, Co-operative Bank and Nationwide Building Society also received downgrades, alongside seven smaller institutions.
Moodys attributed the downgrade to a reassessment of the UKs support environment.
Announcements made, as well as actions already taken by UK authorities, have significantly reduced the predictability of support over the medium to long-term, said Moodys in a statement. The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the Government.
Experts have suggested that the perceived removal of support, and the subsequent downgrade, can be attributed to the recommendations of the Independent Commission on Banking (ICB) the so-called Vickers report.
The report has recommended a ring-fencing of retail banking from investment banking, and that banks must hold a minimum of 10% equity capital in the ringfenced portion of the business.
Meanwhile, the 10% requirement is slightly more strenuous than that demanded by the Basel III regulations. The UK-specific nature of these downgrades seems to lend support to claims that the Vickers report is at their root.
This downgrade is due to the changing regulatory environment and its so UK specific that it has to be down to the ICB report, says Michael Browne, fund manager at Martin Currie.
Furthermore, Moodys has indicated that the downgrade stems from a lack of systemic support, rather than direct impact on the banks strength. This suggests that the rationale for the downgrade does not stem from other regulatory changes, such as Basle III, but from a shift in the countrys political will manifested in the ICB recommendations.
The downgrade wasnt due to the banks fundamentals its financial strength but the environment, says Carlo Mareels, director at RBC Capital Markets. This means that the downgrade is specifically in response to the ICB reports recommendations, which highlights a more general shift by the political leadership in the approach towards potential losses in the banking system. Were it a response to Basle III, then the downgrade would be rooted in the fundamentals.
Indeed, Mareels feels that, in the long term, the stability afforded by the Basel III recommendations may bring an improvement in ratings, once the initial shock of the regulatory change has been dealt with.
Its possible that Basle III could lead to a lift in ratings in the longer term, he says. In the short to medium term, further downgrades cannot be ruled out as the negative macro backdrop continues to evolve. Once the macro outlook will turn more positive, the Basle III-induced heightened level of predictability could lead to ratings increases.
It will be interesting to see how the downgrades from Moodys affect the implementation of the ICBs recommendations. Certainly, there will be renewed criticisms of the effects that the recommendations will have on the financial sector and the economy at large.
This means some of the assumptions made as to the costs of the reports recommendations are going to be left open to challenge, says Browne.
David Buik, partner at BGC Partners, was doubtful that the announcement was likely to have an impact both in the field of regulations and more generally.
The downgrading we saw today was pointless and superfluous to requirement, says Buik. Hell will freeze over before Lloyds or RBS are allowed to go bust. Lloyds is the largest retail bank on the high street, and the Government simply has too much money in RBS to allow that to happen.
The announcement has come at the end of a long period of concern regarding the stability of the UK financial sector, to the point where some may wonder if Moodys has been too slow off the mark to draw attention to the potential problems.
They should have done this weeks, if not months, ago thats why theres going to be so little fallout from this, says Buik. The ratings agencies are supposed to be warning the market, but all Moodys is doing is reacting. This is nothing more than Moodys pouring salt on the wound.