British Financial Institutions Suffer Ratings Downgrade
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October 7, 2011 TheFreshOutlook  |
Moody’s has downgraded the credit rating of a dozen British financial firms citing the decreased likelihood of future government support.
The credit ratings agency, Moody’s, has downgraded the rating of 12 UK banks, saying that it does not foresee significant government backing in the event of another financial crisis.
In a statement, Moody’s said it had come to the decision though a “reassessment of the support environment in the UK which has resulted in the removal of systemic support”.
The downgrade has affected several big banks such as Lloyds, TSB and RBS. A number of building societies including Newcastle, Nottingham and Principality have also had their ratings cut.
RBS reacted to the announcement by saying that it did not reflect the “significant progress” it had made in restructuring its finances whilst Lloyds implied that the downgrade was merely a reflection of what it had already learned through market activity.
Chancellor George Osborne said that the downgrades showed that his government had taken important steps to dissuade the “too big to fail” culture which prevailed during the last financial crisis in 2008. At that time, massive government bailouts ensured that banking system survived complete decimation.
In an interview with the BBC, Mr Osborne said that the downgrades were proof of the new realisation that “banks have to show they can pay their way in the world”.
He added that British banks had sufficient capitalisation and that they were in a much better position than those in the eurozone. The main consequence of a reduction in a bank’s credit rating is that it becomes more expensive for the bank to borrow.
Ratings agencies evaluate credit worthiness on the basis of what they term “economic, regulatory and geopolitical influences, management and corporate governance attributes, and competitive position”.
Moody’s share 80% of the credit rating market with Standard & Poor’s. Their ratings carry such weight because of their status as Nationally Recognized Statistical Rating Organisations in the US. Another agency, Fitch, also carries this status. In the past few months, the agencies’ have been involved in downgrading the US and Italian national debt.
The agencies make their very substantial profits from charging organisations who want to rate their bonds. In 2010, Moody’s and S&P both earned between $600-800 million.
However, some commentators are critical of the influence that credit rating agencies wield on financial markets. In August, Nobel-Prize winning Economist Paul Krugman accused S&P’s of miscalculating its downgrade of US debt. The agencies’ credibility was also damaged by fact that they rated sub-prime mortgages as secure in the lead up to the 2008 financial crisis.
By Dermot Tobin
[Image Courtesy Of Shirley de Jong)]
