DealBook: Moody’s Cuts Ratings for 12 British Banks

Scott Eells/Bloomberg NewsMoody’s Investors Service headquarters in Manhattan.

6:02 p.m. | Updated

Moody’s Investors Service on Friday downgraded its ratings on 12 British financial institutions, including Lloyds TSB Bank and the Royal Bank of Scotland, saying it thought Prime Minister David Cameron’s government was less likely to provide support for them in the event of failure.

It cut the senior debt and deposit ratings on the 12 lenders, citing its “reassessment of the support environment in the U.K., which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support by one to three notches for five larger, more systemically important financial institutions.”

Both Lloyds TSB Bank and Royal Bank of Scotland were bailed out by taxpayers during the 2008 crisis and most likely would have collapsed without that support.

Mr. Cameron’s chancellor of the Exchequer, George Osborne, said the downgrades were expected because the government was pursuing the right policy.

“As I understand it,” Mr. Osborne told BBC radio, “one of the reasons they’re doing this is that they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain, in other words trying to deal with the ‘too big to fail’ problem.”

He said the Vickers Commission report, which called in September for the separation of retail and investment banking activities, demonstrated that the government was serious about overhauling the industry.

“In other words,” he told the BBC, “people ask me, how are you going to avoid Britain and the British taxpayer bailing out the banks in the future? This government is taking steps to do that, and therefore credit ratings agencies and others will say, ‘Well actually, these banks have got to show that they can pay their way in the world.’ ”

Shares of Royal Bank of Scotland fell 3 percent in London, while Lloyds TSB Banking fell 3.4 percent.

Mr. Cameron added that he was “confident that British banks are well capitalized; they’re liquid; they’re not experiencing the problems that some of the banks in the euro zone are experiencing at the moment.”

Moody’s said British banks’ ratings continued to receive “up to three notches of uplift” from expectations of support, but “it is more likely now to allow smaller institutions to fail if they become financially troubled.” It noted that the Bank of England, the Financial Services Authority and the Treasury had all made it clear that in the future the government would be more likely “to make greater use of its resolution tools to allow burden-sharing with senior bondholders.”

It stressed that the ratings cuts “do not reflect a deterioration in the financial strength of the banking system or that of the government.”

It cut Lloyds TSB Bank and Santander U.K. to A1 from Aa3, Co-Operative Bank to A3 from A2 and R.B.S. and Nationwide Building Society to A2 from Aa3. It cut seven smaller institutions, as well.

Shares of Royal Bank of Scotland fell 3 percent in London, while Lloyds TSB Banking stock fell 3.4 percent.

Moody’s said four British banks continued to benefit from “a very high likelihood of support” from the government, including Barclays and HSBC Holdings, as well as Lloyds TSB and the Royal Bank of Scotland. It did not change its ratings of Barclays and HSBC.

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