Moody's Could Cut UK Banks' Ratings

The credit ratings of some of the UK’s largest banks could be slashed because of worries about what will happen when the government stops propping them up, the agency said in a statement Tuesday.

Royal Bank of Scotland (RBS) and Lloyds TSB, which are both majority-owned by the British taxpayer, are among the 14 financial institutions that ratings agency Moody’s is considering for downgrades.

Keith Brofsky | Photodisc | Getty Images

Despite well-publicised recent troubles, both banks still hold an Aa3 rating from Moody’s, one of the highest ratings the credit agency can bestow. The rating of Nationwide Building Society, one of the UK’s biggest mortgage lenders, is also under review.

Moody’s has started examining financial institutions which are directly supported by the government, such as RBS and Lloyds, or may have had their long-term ratings chanced by the credit crisis.

The banks are under pressure from the government to lend more money to small businesses, under the terms of the Project Merlin deal agreed with the government in February. Some of them had to seek government support after over-extending themselves during the credit crisis.

The ratings of Bank of Ireland’s UK operations, the Co-Operative Bank, Coventry Building Society; Newcastle Building Society; Norwich & Peterborough Building Society; Nottingham Building Society; Principality Building Society; Spanish bank Santander’s UK operations; Skipton Building Society; West Bromwich Building Society and Yorkshire Building Society could also be downgraded, the agency said.

It is also examining Clydesdale Bank, part of troubled National Australia Bank.

“The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the government,” said Elisabeth Rudman, a Moody's Senior Credit Officer and lead analyst for a number of UK banks.

“It has been initiated in response to ongoing guidance from the UK authorities (the Bank of England, the Financial Services Authority and the Treasury) that banks that fail in the future should not expect capital injections from the public purse," Rudman added.

"While we note - and will take into consideration - the technical difficulties in resolving larger, complex banks, we will also need to assess the likelihood of further developments in this area over the medium term, given the very clear determination of the UK government to put in place a resolution mechanism that can also be applied to large, complex banks,” she continued.