Moody's Investors Service sent shockwaves through the global banking system and sparked fury in the City yesterday as the ratings agency threatened to slash the credit scores of more than 100 banks in the wake of Europe's debt crisis.
The agency has put the ratings of 114 banks in Europe under review, as well as 17 investment banks. The move could hit 122 banks in total as nine of the investment banks are based in Europe.
All four of the UK's big banks – HSBC, Barclays and the state-backed Royal Bank of Scotland and Lloyds – face potential downgrades, affecting their ability to fund themselves in financial markets and potentially hampering an already weak recovery.
Michael Symonds, a bank analyst at Daiwa Capital Markets Europe, said: "The banks are getting it from all sides at the moment – the ratings are only going in one direction. All things being equal, a lower rating will make it more expensive for them to fund themselves and make funding sources scarcer as some bond funds can only hold bonds of a certain rating."
One senior banker said: "This is yet another example of the ratings agencies pandering to the populist mood rather than giving markets and investors anything which is informed, useful or timely."
Moody's assault on the banks came two days after it slashed sovereign ratings on a host of European nations, including putting Britain's AAA credit rating on negative outlook.
The ratings agency blamed "disrupted markets and a deteriorating, uncertain economic outlook" for its bank review but warned that in some countries – such Italy and Spain, whose banks are under the closest scrutiny – doubts over the creditworthiness of governments themselves exacerbated the risks.
Moody's added that investment banks in particular were facing headwinds such as "more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions", which would diminish long-term profits and growth prospects.
Morgan Stanley of the US and two Swiss banks, UBS and Credit Suisse, could be knocked three notches lower on Moody's creditworthiness scale. Goldman Sachs could be downgraded by two notches, the agency said. "Rapidly changing risk positions expose these firms to unexpected losses that can overwhelm the resources of even the largest, most diversified groups," it said.
In December the European Central Bank pumped nearly €500bn (£419bn) into the European financial system, easing the pressure on hundreds of strugglers that took up three-year loans. But the European Banking Authority has also called on the region's banks to bolster their finances by €115bn.
Despite the fury in the City over the cuts, Moody's managing director of European banks, Johannes Wassenberg, denied that the ratings agency was part of the problem, saying it was providing "transparency" to the market. "There is a lot of information assymetry out there between borrowers and lenders, and we are reducing that assymetry."