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Top Rating Agencies Say European, U.K. Banks are Solid

CNBC.com
Wednesday, 19 Sep 2007 | 12:05 PM ET

Most banks in Europe are not likely to be hit very hard by the recent turmoil in credit markets, and the Northern Rock crisis is not likely to spill in the U.K. mortgage sector, two top ratings agencies said Wednesday.

Pierre Cailleteau, senior vice president of international policy analysis at Moody's, told "Worldwide Exchange" that European banks seem to have committed "enough cash to finance liquidity calls."

"The core of the banking system is pretty resilient," Cailleteau said, but warned that "banks could take back on their balance sheet some of that risk" that was previously spread with the help of financial innovations.

Meanwhile, the troubles at Northern Rock are unlikely to be replicated by the broader British mortgage sector, rating agencyFitch said in a statement.

"The U.K. mortgage sector remains robust from an asset point of view with arrears and repossessions increasing slightly as we move through the credit cycle, but still close to historical lows," Gordon Scott, managing director in Fitch's Financial Institutions Group, said.

The rating agency said it had discussions "with all its rated U.K. mortgage lenders to assess potential vulnerability to changing market conditions."

Pressures for Transparency

Northern Rock was forced to borrow from the Bank of England last week at a high penalty rate, having run into liquidity problems because it finances a big part of its operations in the short-term credit markets, which have seized up.

Fitch said it expects the mortgage lender's funding to stabilize after the U.K. government pledged to guarantee depositors' funds entirely following a three-day run on the bank.

But it added that it was not a long-term solution and said a takeover of Northern Rock would likely solve its problems, although British banks may shy away from such an option.

Moody's Cailleteau said the Northern Rock case served as a stark lesson to banks.

"There's going to be some pressure in terms of transparency … there will also be pressure to increase liquidity and capital buffers," he told "Worldwide Exchange.

Shares in the banking sector joined the sentiment-driven rally in European stock markets on Wednesday, closing broadly higher.