Credit rating agency Moody's downgraded Britain's part-nationalised banks Lloyds and Royal Bank of Scotland today, and cut the ratings on nine Portuguese banks.
The cuts to RBS and Lloyds formed part of a broader downgrade of 12 British financial companies by Moody's, which had already been flagged by the agency earlier in the year.
Moody's cut RBS by two notches to A2 from Aa3, and downgraded Lloyds TSB by one notch to A1 from Aa3. It also cut its ratings on Santander UK, the Co-Operative Bank, Nationwide Building Society and seven other smaller British building societies.
Moody's did not change its rating on Barclays and HSBC, which along with RBS and Lloyds represent the "Big Four" group of lenders that dominate British banking.
"Moody's believes that the government is likely to continue to provide some level of support to systemically important financial institutions, which continue to incorporate up to three notches of uplift," it said in a statement.
"However, it is more likely now to allow smaller institutions to fail if they become financially troubled. The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government," it added.
Mr Osborne said Britain's banks remained well-capitalised and in better shape than many of their European rivals, who face bigger losses on writedowns to their holdings of Greek government debt.
In an interview with BBC radio, he also said the Bank of England's decision to pump more money into the economy and the government's deficit reduction plans would help shield Britain from the euro zone debt crisis.
"People ask me 'how are you going to avoid Britain and the British taxpayer bailing out banks in the future?'
"This government is taking steps to do that, and therefore credit rating agencies and others will say 'well, actually these banks have got to show that they can pay their way in the world'.
"And I am confident that British banks are well capitalised, they are liquid, they aren't experiencing the kind of problems that some of the banks in the euro zone are experiencing at the moment."
Lloyds said the Moody's downgrade would only have a "minimal" impact on its funding costs, while RBS reiterated that it remained strongly capitalised and had strengthened its credit profile.
"The downgrades have been well flagged, reflecting removal of government support through guaranteed liquidity schemes and low probability of future tax-payer bail-outs," Oriel Securities said in a research note.
Moody's also downgraded nine Portuguese banks today due to increased asset risk as a result of the banks' holdings of Portuguese government debt and the sovereign downgrade of Portugal in July to Ba2 with a negative outlook.
"The key driver for the downgrades of most banks' debt and deposit ratings is Moody's assessment of the deterioration of their unsupported financial strength," said the ratings agency.
Moody's said it had downgraded by one or two notches the senior debt and deposit ratings of nine banks and downgraded by one or two notches the standalone ratings of six of these banks.
All of the banks' ratings carry a negative outlook with the exception of Banco Portugues de Negocios, which has a developing outlook on all of its ratings. it said.
The six banks which experienced downgrades of standalone ratings and debt and deposit ratings are: Caixa Geral de Depositos; Banco Comercial Portugues; Banco Espirito Santo; Banco BPI; Banco Santander Totta and Caixa Economica Montepio Geral.
Banco Internacional do Funchal and Banco Portugues de Negocios had their debt and deposit ratings downgraded as a consequence of the weaker Portuguese sovereign. The debt ratings downgrade of Espirito Santo Financial Group followed the lower rating of its operating company, BES.
Moody's said it expected a further deterioration of the banks' domestic asset quality due to a weak economic growth outlook and government austerity measures, and liquidity strains due to a lack access to wholesale funding.
Moody's said if recapitalisation and deleveraging plans for Portuguese banks were successful they would help restore confidence in the Portuguese banks.
"However, Moody's believes that these plans face significant implementation risks," it said.
Separately, trading in the shares of Spanish retail banks Popular and Pastor was suspended, stock market regulator CNMV said.
A source claimed Banco Popular will buy its smaller rival Banco Pastor, but both banks declined to comment.
"Trading has been suspended due to circumstances which could alter the normal trading activity," the regulator said in a statement.
Popular is one of Spain's top five banks. Its capital ratio in the European bank stress test in July was 5.3 per cent compared with 3.3 per cent at Pastor, one of the banks that failed the test.
Popular shares last traded at €3.57, up 1.3 per cent, while Pastor was up 4.8 per cent at €3.03.
Reuters
