Banks’ credit ratings downgraded as state bailout guarantees recede


Economics Editor

The scourge of “too-big-to-fail” banks in the UK is receding, according to the Moody’s credit rating agency.

Moody’s downgraded the outlook of British financial institutions yesterday from stable to negative and said the major reason for the change was the increasing likelihood that banks would not be able to count on a public bailout if they were to get into trouble again.

The previous Labour government pumped £66bn of taxpayers’ money into Lloyds and the Royal Bank of Scotland during the 2008/09 financial crisis because officials judged that allowing those insolvent banks to go bankrupt would inevitably impose catastrophic costs on the wider economy.

Since then, politicians and regulators have been trying to tackle the problem of too-big-to-fail by establishing a legal resolution regime for complex troubled financial institutions, whereby unsecured bondholders would automatically take losses in a crisis.

“The UK Government is now able to finalise the secondary legislation to implement the structural reforms relating to the UK resolution and bail-in regime and the related ring-fencing framework,” said Moody’s Carlos Suarez Duarte, who wrote the report.

Moody’s added that the Coalition’s legislation to impose a “ring-fence” around the retail arms of large banks by 2019 would also help remove the need for taxpayers to rescue banks in another emergency.

The withdrawal of the de facto state guarantee of banks’ liabilities means their credit rating should fall, which is why Moody’s has changed its grading of their bonds. Andy Haldane, the Bank of England’s chief economist, has estimated that the world’s big banks enjoyed an implicit taxpayer subsidy, through lower funding costs as a result of being too-big-to-fail, of €700bn (£550bn) a year at the height of the crisis in 2009.

Despite the downgrade on the back of the too-big-to-fail shift, Moody’s said the prospects of the major UK banks had improved due to the recovery. It argued the credit fundamentals of banks was better and that rising interest rates over the coming years should make banks more profitable. However, Moody’s also noted UK banks still face exposure to both conduct and litigation charges for rate fixing.

The share prices of the major banks were little changed on the back of Moody’s report. Royal Bank of Scotland was down 1.5 per cent, Barclays 1 per cent and Lloyds 0.7 per cent. HSBC was flat.

A report last month from the US Government Accountability Office suggested that the “too-big-to-fail” problem was also receding from the American financial sector as a result of new regulations from Congress since the financial crisis.

However, regulators seem less sure that too-big-to-fail is declining as a problem. Under the auspices of the global Financial Stability Board they are still hammering out an agreement on dealing with cross-border banks that get into difficulties.

The issue is due to be tabled at the G20 leaders meeting in Brisbane in November.

There are also indications some banks are pushing back against the reform agenda. The chairman of HSBC, Douglas Flint, has reportedly written to George Osborne asking him to push back the planned introduction of the retail “ring-fence” on the grounds that banks are facing too much regulatory uncertainty.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Louis Theroux: By Reason of Insanity takes him behind the bars again
tvBy Reason of Insanity, TV review
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Danczuk has claimed he is a 'man of the world'
Seth Rollins cashes in his Money in the Bank contract to win the WWE World Heavyweight Championship
WWERollins wins the WWE World Heavyweight title in one of the greatest WrestleMania's ever seen
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor