Britain's biggest banks saw their credit ratings chopped back last night by Standard and Poor’s, as the agency believes the government is serious in its promise to let bad banks fail.
While ratings are normally cut when a firm performs poorly, in this case the move reflects the shift in risk from the taxpayer and towards bondholders.
In future when a bank fails, investors should take the hit rather than governments.
Barclays, HSBC, Standard Chartered, Lloyds and RBS were joined by European giant Credit Suisse in having their ratings cut.
Nationwide Building Society, Santander UK and Deutsche Bank are among others who have been put on downgrade watch.
“The Bank of England is now much better positioned to execute a swift and effective bail-in of nonoperating holding companies’ creditors if the bank fails,” said the Standard and Poor’s update.
“Even if the UK government decided to support the operating companies of systemic banks, we consider that it would likely be unwilling to extend that support to nonoperating holding companies’ creditors and, indeed, that this would be unnecessary.”
While the Bank of England has forced banks to build bigger capital buffers, the final definitions on how to proceed when a bank fails have yet to be published, meaning some uncertainty hangs over the process.