British banks downgraded, but is anybody listening to Moody's?

RBS

Fears of higher borrowing costs to customers might be overdone, as downgrades have been long anticipated

LAST UPDATED AT 09:19 ON Fri 22 Jun 2012

CREDIT RATINGS agency Moody's downgraded 15 of the world's biggest banks and financial institutions last night, including British banks Royal Bank of Scotland, HSBC, Barclays and Lloyds.

In the US, Bank of America, Citigroup, Goldman Sachs and JP Morgan were all downgraded. But there is evidence that the report by Moody's, which is yet to recover from the blow to its credibility dealt by its failure to call the subprime crisis, will be taken with a pinch of salt – and the effect on bank customers is likely to be minimal.

In its report, Moody's said that the banks risked massive losses because of their exposure to the financial crisis and each other. "All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities," said a Moody's spokesman.

Logically, the downgrade should make it more expensive for the affected banks to borrow, leading to higher interest rates. But the downgrades had been long anticipated, with the Bank of England last week announcing it would make cheap loans available to banks to boost lending to households and businesses. The first monthly auction of these cheap loans was held on Wednesday and banks snapped up all £5 billion on offer.

Lloyds has already said it does not think the downgrade will have any impact on its funding as it had been aware of a possible downgrade as long ago as February and had already factored in increased costs.

RBS which is sitting on a large cash pile, criticised the new rating, according to The Times. It said: "The Group disagrees with Moody's ratings change which... we feel is backward-looking and does not give adequate credit for the substantial improvements the Group has made to its balance sheet."

The bank says it could be forced to raise at least £12.5 billion in collateral to secure funds on the wholesale markets.

But the spectre of banks passing on increased costs to customers is not one that sits well with some critics. Lord Oakeshott, a former Lib Dem Treasury spokesman, believes the banks have had enough help to absorb any additional funding costs, reports The Daily Telegraph.

"The banks have just had their mouths stuffed with even more government gold. It would stink if they hid behind a downgrade to hoard the extra tens of billions taxpayers have handed them instead of lending it to head off a slump," he said.

The peer added that the banks could perhaps cut other costs, such as high executive pay, before looking to customers. "If they even cut £5 million from bonus packages, they could lend another £100 million to help businesses," he said.

Such worries might be premature. Some have voiced doubt as to whether the Moody's downgrade will have any effect at all given their track
record: during the financial crisis high ratings were awarded to various investment banks linked to subprime mortgages, and similar high ratings were given to banks that would have collapsed without state bailouts, reports The Independent.

Lenders have become increasingly dismissive of ratings agencies like Moody's. One banker said yesterday: "You have to look at this in context. The market will take its own view of a bank's creditworthiness, and what's going on in Europe is well known." · 

Disqus - noscript

How anyone can believe the ratings agencies is beyond me. These are the same people which rated the toxic mortgage financial products as AAA investments...shortly before it was discovered they were worthless. I am not sure if it was someone from Moodys or S&P but they confirmed they knew the investments were destined to fail but those behind them were their clients and they couldn't lose the business!

Seems to me that all governments (via G20 and/or IMF) should make the ratings agencies illegal. They add nothing to knowledge (witness thier failures pre-crash) and are merely a vehicle to promote and aid speculation at the expense of oridnary peopel.

For further concise, balanced comment and analysis on the week's news, try The Week magazine. Subscribe today and get 6 issues completely free.