Bank ratings under review

MOVES to do away with the “too big to fail” problem have prompted Moody’s to launch a revaluation of all of its ratings for major UK banks.

The ratings agency said yesterday that it is embarking upon a reassessment of its ratings on all senior bank debt that could see downgrades of one to five notches, which would substantially raise banks’ cost of borrowing.

The agency said the review was prompted by signals from the Treasury, the FSA and the Bank of England “that banks that fail in the future should not expect capital injections from the public purse”, with “living wills” to set out how a bank can be wound up in an orderly way if it fails likely to become mandatory in the next year.

The assessment by Moody’s will “focus on the high systemic support assumptions currently incorporated in senior debt ratings” for UK banks.

The agency said that whereas before the crisis, the likelihood of government support accounted for a ratings uplift of one to two notches for banks, it now accounts for up to five notches.

But in a sign of the difficulty of designing a regulatory system where large banks are allowed to fail, it said that it would “continue to assume some systemic support for the major UK institutions at least pending greater clarity” from Europe and the Independent Commission on Banking.

The review affects all the UK’s five biggest lenders and major building societies.