April 7, 2011

Moody's Threatens Ratings Cuts to Small U.K. Banks

Bigger banks may be in for downgrades later

Saying that it was reassessing smaller U.K. banks that might not be able to seek bailouts from the government in case of trouble, Moody's Investors Service on Thursday said that as many as 18 of those institutions might find their ratings on the chopping block.

Larger institutions, such as Lloyds and Royal Bank of Scotland, would be reevaluated later, the rating agency said, indicating that until that time those banks might be subject to negative outlooks.

According to a Reuters report, the company said it was examining those smaller banks to see how they might survive absent rescue should they run into trouble. It added that those smaller banks might be slashed several notches once its evaluation was complete. It has already taken similar steps in Portugal and Spain.

Saying that the authorities in the U.K. have already made it clear that they will not always be there to rescue the smaller banks, Moody's said in a statement, "The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the government."

Banks that might be subject to downgrade are mostly those smaller ones, according to the company, and include among their number building societies. Moody's said that they had benefited from as many as five notches added to their senior debt ratings, thanks to implied support from the U.K.'s banking system, but were unlikely to be deemed systemic in the medium term and thus less likely to be ensured of such support should the need arise.

The company is continuing, as it had begun in March, to review implicit government support that had been factored into banks' ratings; it is performing such a task on a country-by-country basis for smaller financial institutions throughout Europe and making adjustments accordingly.

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