Moody's Downgrades British Banks

Lloyd's, RBS hit by cuts as part of broader action

Moody's on Friday downgraded a dozen U.K. banks, including Lloyds TSB Bank, a unit of Lloyds Banking Group, and Royal Bank of Scotland, saying that there was increasing likelihood that smaller banks would be allowed to fail if troubles worsened.

However, George Osborne, Britain's finance minister, hastened to reassure the public, saying that the banks were in good shape to contend with the ongoing European financial crisis.

The Daily Mail reported that Moody's took the action against 12 banks, cutting Lloyds TSB Bank by a single notch and RBS by two notches; both are partially owned by the British government. The move came a day after the Bank of England expanded its quantitative easing program, as reported by AdvisorOne, and the governor of BoE said the U.K. faced "the most serious financial crisis" ever seen.

AFP reported Osborne saying British banks were in better shape than those in the eurozone. "I am confident that British banks are well capitalized, they are liquid, they are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment," he said, adding, "As I understand it, one of the reasons they [Moody's] are doing this is because they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain."

The Financial Times said that the British government might have to inject additional funds into RBS, should it fail a reassessment of July stress test results being performed by the European Banking Authority. The data are being rerun figuring in market-based write-downs of sovereign debt holdings.

Banks that passed the test in July may not emerge quite so handily from the new assessment; just this week French-Belgian bank Dexia was being evaluated for breakup after its debt load was revealed to be insurmountable. Dexia passed its stress test in July with flying colors.

Other banks affected by the Moody's action were Spanish bank Santander's British business unit; Co-Operative Bank; Nationwide Building Society; Newcastle; Norwich & Peterborough; Nottingham; Principality; Skipton; West Bromwich; and Yorkshire.

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