UK banks downgraded as Europe awaits stress tests


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Signs that the Government has become less likely to support lenders led to anther credit rating downgrade for Lloyds and Royal Bank of Scotland yesterday against the backdrop of concerns that new European stress tests could leave the sector in need of billions of pounds of extra capital.

The ratings agency Fitch lowered its credit score for both Lloyds and RBS to A from AA-minus, reflecting its view that "support dynamics are changing in the UK". Fitch also put Barclays on negative watch, meaning that it could be downgraded in the future.

"The banking system is not only large relative to the UK economy but there is also more advance political will to reduce the implicit support for the country's banks," Fitch said, citing the Vickers Commission's recommendations to ring-fence retail banks from riskier investment operations.

The move followed similar action by Fitch's rival agency Moody's last week, and came amid fears that RBS could end up in needing billions in extra capital as a result of new stress tests by European authorities.

Officials are working on plans to recapitalise the banking system as they seek to protect it from the sovereign debt crisis. The European Banking Authority (EBA) is expected to apply hefty discounts to the sovereign bond holdings to asses their ability to withstand the crisis. Reports suggest that it could also raise its threshold for what it considers an adequate capital cushion or core tier one capital ratio to 9 per cent.

Credit Suisse analysts said that, based on the reports and after applying a tougher stress test than that applied by the EBA when it last studied balance sheets in the summer, RBS could need about €19bn (£16.5bn) in extra funds. Germany's Deutsche Bank and France's BNP Paribas could require up to €14bn each, while Société Générale and Barclays "would need roughly €13bn".

But the various moving parts mean that other analysts came to different conclusions. Evolution Securities, for example, said that UK banks had done the heavy lifting, and did not require any additional capital at all.