ISH banks were among 15 global financial institutions hit by a sweeping set of downgrades from rating agency Moody’s late last night.
Barclays’ credit rating was cut two notches, while HSBC and RBS each had a notch knocked off their ratings.
In a separate but concurrent announcement, Lloyds also had its rating downgraded by one notch.
The move had been widely expected throughout yesterday evening, but nonetheless threatens to cost the world’s biggest lenders billions in extra borrowing and collateral costs.
The Dow Jones in New York endured its second worst day of the year, with some banks closing down on fears of an impending downgrade from Moody’s.
“I expect the FTSE will open down this morning by around 50 points,” commented Joshua Raymond of City Index late last night.
There was some relief after the announcement for Morgan Stanley, however, which saw its rating cut by just two notches – a less severe verdict than the three-notch cut that Moody’s had previously threatened.
Morgan Stanley shares gained just over three per cent in after hours trading, following the statement.
The harshest knock was dealt to Credit Suisse, which was listed as the only bank to be downgraded by three notches. The decision adds to a miserable fortnight for the lender, after the Swiss National Bank said last week that Credit Suisse must bolster its capital buffers more quickly.
“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,” warned Greg Bauer, a banking director at Moody’s.
Yet many banks are expected to publish retorts today, in a bid to defend their credit worthiness. Last night Lloyds was the first to react:
“We believe this change [to our credit rating] will have limited impact on our funding costs and market capacity,” Lloyds said. “It is important to note that Moody’s has confirmed that Lloyds’ short-term funding rating remains unchanged.”
RBS also hit back: “The group disagrees with Moody’s ratings change, which the group feels is backward-looking and does not give adequate credit for the substantial improvements... made to its balance sheet, funding and risk profile.”
Moody’s had announced in mid February that a review was underway into global investment banks’ ratings, arguing that existing ratings did not adequately take into consideration the more fragile funding conditions, wider credit spreads and increased regulatory burdens.