UK Banks downgraded by Moody's rating agency
On Thursday 6th October 2011 Sir Mervyn King the Bank of England's governor expressed fears that Britain is in the grip of the world's worst ever 1930s-style shortage of money financial crisis, after the Bank of England announced it was injecting £75bn into the ailing economy. Read more
Then on Friday 7th October 2011 Moody's Investors Service downgrades the credit rating of 12 UK financial firms including Lloyds TSB, RBS, Nationwide and Santander UK.
The rating actions include a one-notch downgrade of Lloyds TSB Bank plc (to A1 from Aa3), Santander UK plc (to A1 from Aa3), Co-Operative Bank plc (to A3 from A2), a two-notch downgrade of RBS plc (to A2 from Aa3) and Nationwide Building Society (to A2 from Aa3); and downgrades of one to five notches of 7 smaller building societies. The ratings of Clydesdale Bank were confirmed at A2 (negative outlook). As outlined in the May press release, we have reviewed the standalone ratings of all entities prior to concluding on the debt ratings. A separate announcement today covers the upgrade of the standalone rating of Co-Operative Bank to C- (mapping to Baa1 on the long-term debt scale) from D+ and earlier announcements cover the upgrades of the standalone ratings of Santander UK, Nationwide, Yorkshire, and Principality Building Societies. Barclays and HSBC remained unchanged.
Moody's said it now believed the UK government was less likely to support some firms if they got into trouble because banks are becoming more independent of the government.
However, the firm emphasised that the downgrades did not "reflect a deterioration in the financial strength of the banking system".
Moody's also downgraded nine Portuguese banks, blaming financial weakness.
Shares in RBS and Lloyds fell sharply at the start of trading, but then recovered. By early morning RBS shares were down 0.25% while Lloyds was 1% lower bbc.co.uk
What do the letter ratings mean?
Long-term obligation ratings
- Aaa: Moody judges obligations rated Aaa to be the highest quality, with the "smallest degree of risk".
- Aa (Aa1, Aa2, Aa3): Moody judges obligations rated Aa to be high quality, with "very low credit risk", but "their susceptibility to long-term risks appears somewhat greater". (AA+, AA and AA- in S&P)
- A (A1, A2, A3): Moody judges obligations rated A as "upper-medium grade", subject to "low credit risk", but that have elements "present that suggest a susceptibility to impairment over the long term". (A+, A and A- in S&P)
- Baa1, Baa2, Baa3: Moody judges obligations rated BAA to be "moderate credit risk". They are considered medium-grade and as such "protective elements may be lacking or may be characteristically unreliable"
Speculative grade (also known as "High Yield" or "Junk")
- Ba1, Ba2, Ba3: Moody judges obligations rated Ba to have "questionable credit quality."
- B1, B2, B3: Moody judges obligations rated B as speculative and "subject to high credit risk", and have "generally poor credit quality."
- Caa1, Caa2, Caa3: Moody judges obligations rated CAA as of "poor standing and are subject to very high credit risk", and have "extremely poor credit quality. Such banks may be in default..."
- Ca: Moody judges obligations rated Ca as "highly speculative" and are "usually in default on their deposit obligations".
- C: Moody judges obligations rated C as "the lowest rated class of bonds and are typically in default," and "potential recovery values are low".