Confidence in the UK's financial sector was dealt a blow today after an agency slashed the credit ratings of some of Britain's biggest banks to reflect reduced Government support.
Lloyds Banking Group, Santander UK, Royal Bank of Scotland, Co-operative Bank, Nationwide and seven smaller building societies had their debt downgraded by Moody's Investor Service.
The widely-expected move - which triggered a fall in banking shares on the London Stock Exchange - reflects moves by the Government to shift risk away from taxpayers and on to creditors but could see the cost of borrowing for the affected financial institutions increase.
The Chancellor said he was sure the banks were well funded, while Lloyds and RBS defended their record on improving their finances.
Moody's stressed its review did not reflect a deterioration in the financial strength of the banking system or the Government.
In fact, the agency upped the ratings on the basis of stand-alone financial strength for five institutions - Co-op, Nationwide, Santander and Yorkshire and Principality building societies.
Elisabeth Rudman, senior vice president of the financial institutions group at Moody's, said: "Moody's has lowered the amount of support it incorporates into the institutions' ratings to reflect the overall weakening support environment."
Moody's said the downgrade came after Government support was removed for the seven small institutions, while help was reduced for larger "more systemically important" institutions including RBS.
The smaller building societies are Newcastle, Norwich & Peterborough, Nottingham, Principality, Skipton, West Bromwich and Yorkshire, Moody's said.
While the Government is "likely to continue to provide some level of support" to bigger banks, Moody's said it is "more likely now to allow smaller institutions to fail" if they hit troubled waters.
Lloyds, Santander and Co-op Bank had their ratings downgraded one notch, RBS and Nationwide a two-notch revision, while the seven building societies saw ratings cut by between one and five places.
Chancellor George Osborne said the move reflected the British Government's shift away from guaranteeing all the UK's largest banks.
He added: "I'm confident that British banks are well capitalised, they are liquid, they are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment."
Taxpayer-backed Lloyds, which is 40.2% state-owned, stressed that its stand-alone rating had not changed.
A Lloyds spokesman said: "It is important to note that both the stand-alone rating and short-term ratings remain unchanged. We believe this change will have minimal impact on our funding costs."
RBS, which saw its shares drop more than 3%, also came under pressure after a report in the Financial Times suggested it could require a further bailout from the Government.
The bank said it was "disappointed" that Moody's had not acknowledged its progress in strengthening its finances since 2008.
It is understood RBS, which is 83% owned by the taxpayer, could be liable for another bailout if it fails a rerun of European banking stress tests.
RBS, which received the biggest bailout of the 2008 financial crisis, could see its protective cash buffers fall below regulators' requirements after exposure to eurozone debt is taken into account.
RBS has reduced its exposure to debt-laden nations including Greece and Italy, but it is feared that once so-called "haircuts" - effectively write-offs - are given, the bank will fail to keep up.