David Prosser: Making the banks even less safe?

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The Independent Online

Outlook Moody's, the credit ratings agency, has an interesting take on the banking reforms unveiled by the Chancellor this week. While the aim of George Osborne's ring-fencing proposals is to make the banking sector safer, Moody's says it will actually be more likely to downgrade the ratings it gives leading banks if the reformsproceed as expected.

Its argument is that once the banks have implemented ring-fencing, anything beyond the wall built around retail operations will no longer benefit from an implicit Government guarantee of support. The non-ring-fenced assets would include the banks' corporate bonds, which Moody's and its fellow credit rating agencies would then deem to be more risky.

The agency has already warned that 14 banks and building societies in Britain could be subject to credit rating downgrades in the future because they are now less likely to be bailed out by the Government in the event of a collapse.

There's an important distinction to make here: the aim of the Chancellor's ring-fencing reforms is to reduce the risk of a banking disaster having systemic ramifications, rather than to prevent any bank from collapsing, or even from defaulting on its bonds.

Still, the Moody's intervention is important. Were the ratings agencies to rate leading banks more lowly, it would increase costs even further than the ring-fencing proposals in their own right, with all the implications for the banks and their clients that carries.