NERVOUSNESS IS growing in Whitehall that the UK government might have to inject further capital into Ulster Bank’s parent, Royal Bank of Scotland, as part of an effort to recapitalise Europe’s banks.
Moody’s added to that unease yesterday by downgrading RBS amid a re-rating of the UK banking sector after a review of the systemic support offered by the British government. The rating agency also acted on Portuguese banks, cutting the rating of nine of its financial institutions.
RBS received the biggest bailout of the 2008 crisis and is one of five blue-chip banks whose core tier-one capital ratio – a key measure of financial strength – risks falling short of regulators’ requirements after they write down the banks’ exposure to the euro-zone periphery.
Although all of Europe’s big banks passed the European Banking Authority’s July stress test, with capital ratios above the 5 per cent core tier-one pass mark, that exercise incorporated virtually no writedowns on peripheral euro-zone sovereign debt.
RBS, Commerzbank, Deutsche Bank, Société Générale and UniCredit had stress-test results in a grey area above the minimum but below 7 per cent. Once sovereign haircuts – likely to range from 20 per cent on Spain up to 65 per cent on Greece – are applied, those numbers will fall, in some cases sharply.
UK chancellor of the exchequer George Osborne insisted yesterday that British banks were well capitalised and liquid following Moody’s decision to downgrade the sector.
He said the rating agency’s action simply reflected government moves to limit its support for the sector – to avoid another bailout.
RBS and Nationwide were downgraded by two notches, while Lloyds, Santander UK and the Co-operative Bank were reduced by a single grade. Seven smaller building societies were also cut as the rating agency warned that the government was more likely to allow smaller institutions to fail “if they become financially troubled”.
Banks had been on review for possible downgrade as part of a trend where state support for lenders is being reduced, and reforms proposed last month by Britain’s independent commission on banking were also expected to have a negative impact.
In Portugal, Moody’s downgraded the credit ratings of nine banks, citing increased asset risk resulting from their holdings of Portuguese government debt, the impact of austerity measures and strains on their liquidity.
The move, which affects all Portugal’s main banks, comes as European leaders are examining ways of strengthening the continent’s financial sector, including a continent-wide recapitalisation plan, amid the deepening euro-zone debt crisis.
The Portuguese downgrades follow a cut by Moody’s in the country’s sovereign debt rating to junk status in July. The ratings of all but one of the downgraded banks – Spanish-owned Santander Totta – were cut to below junk status.
Moody’s said the outlook for all the banks except one – Banco Português de Negócios – was negative, meaning they were at risk of further downgrades.– (Copyright The Financial Times Limited 2011/Reuters)
