UK banks downgraded

Fri,October07, 2011

Leading British banks saw their credit rating slashed Friday amid fresh concerns over future bailouts and a stark warning from the governor of the Bank of England over the serious nature of the current global financial crisis.

In remarks reported Friday, Mervyn King, the central bank governor, warned that the world economy was slowing down “much faster” than expected just a few months ago.

“This is the most serious financial crisis we've seen at least since the 1930s, if not ever,” King said in a stark reference to the Great Depression.

His remarks followed the bank's decision Thursday to inject a further 75 billion pounds (116 billion dollars) into the economy, under the so-called scheme of Quantitative Easing (QE), which has now reached a total level of 275 billion pounds.

Rating agency Moody's said Friday that it had downgraded the credit rating of 12 banks and financial institutions in Britain, including partially state-owned Royal Bank of Scotland (RBS) and Lloyds.

Moody's said it now believed the British government was “less likely” to support some firms if they got into trouble. It emphasised that the downgrades did not “reflect a deterioration in the financial strength of the banking system.”

Other banks and firms included Santander, Nationwide and a number of smaller building societies.

The move triggered a fall in leading banking shares on the London Stock Exchange of more than 3 per cent.

It coincided with a report in the Financial Times Friday that RBS, the bank at the centre of the 2008 credit crunch, require additional recapitalization.

“Moody's has lowered the amount of support it incorporates into the institutions's ratings to reflect the overall weakening support environment,” said a statement released by the agency.

The downgrades include a two-notch cut for government-controlled RBS, and a one-notch cut for Lloyds TSB, a division of part-nationalized Lloyds Banking Group.

It categorized the two banks as having a “high likelihood of support.”

Spanish bank Santander had its British business downgraded by one notch, while Nationwide Building Society suffered a two-notch reduction.

George Osborne, the Chancellor of the Exchequer, said the rating agency's decision was in line with government policy to tackle the “too-big-to-fail problem.”

“Credit rating agencies and others will say, well actually these banks have got to show they can pay for their way in the future.”

But he dismissed suggestions that British banks were not sufficiently capitalized. “They are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment,” said Osborne.

The Financial Times said Friday that the government was concerned that RBS “may need more government money” as part of a wider European effort to recapitalize the banking system - Sapa-dpa.

(sourced iol)