Moody’s, the credit rating agency, has downgraded 12 UK financial organisations, which includes, Lloyds, RBS Santander UK and the Nationwide.

The Agency said "Moody's Investors Service has today downgraded the senior debt and deposit ratings of 12 UK financial institutions and confirmed the ratings of one institution. The downgrades have been caused by Moody's reassessment of the support environment in the UK which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support… for five larger, more systemically important financial institutions."

The reason behind this is that Moody’s has made a reassessment of the support mechanism for these institutions and decided that there has been a ‘…removal of systemic support for 7 smaller institutions and the reduction of systemic support by one to three notches for 5 larger, more systemically important financial institutions’.

The big five fallers were.

  • Lloyds dropped one notch from Aa3 to A1.
  • Santander UK dropped one notch from Aa3 to A1.
  • Co-operative Bank plc dropped one notch from A2 to A3.
  • RBS plc dropped two notches fromAa3 to A2.
  • Nationwide Building Society dropped two notches from Aa3 to A2.

Government support for financial institutions is now so intertwined into the system that Moody’s has formed categories for levels of support and factors it into the banks’ ratings.

The first, banks with a ‘very high likelihhood’ of support. The second, those with a ‘moderate or high likelihood of support’. The third are those with a ‘low or no likelihood of support’.

This is then put in the pot with the banks’ standalone ratings (ie no government support) to come up with a final figure.

It is worthy of not that the Co-op, Nationwide, Santander UK, and the Yorkshire and Principality have all had their standalone ratings increased in the recent past. But ‘…these improvements in standalone financial strength have not been sufficient to offset all of the downward rating pressure from lower systemic support.’

Just look at that and ask yourself ‘how can an institution’s “standalone” rating be further affected by a lack of systemic support?’ How can that possibly make sense? If they can standalone at a certain level without government support then how can the threat of withdrawal of a support that is not there possibly affect them?

Unless of course for example, that government action taken to systemically bolster up some banks would then systemically disadvantage those other banks that it considered unworthy to the extent that it adversely affected their businesses.

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