Levels of systemic support to be reassessed
London, 24 May 2011 -- Moody's Investors Service has today announced rating reviews,
outlook changes and rating affirmations across 18 UK financial institutions
whose debt and deposit ratings incorporate an assumption of support from
the UK government (commonly known as systemic support). The ratings
of 14 of these institutions (listed below) are being reviewed for possible
downgrade. This follows Moody's announcement on 7 April 2011
that it would reassess the levels of systemic support incorporated in
the senior debt ratings of UK financial institutions in order to align
their ratings with the changes to systemic support that are evolving in
this post-crisis environment.
During the review process, which will likely take around three months,
the rating agency will focus on:
1. The extent of support that should be incorporated into each
institution's ratings, taking into account how difficult it
would be for regulators to deal with a failure of the institution (in
other words, the "resolvability" of the institution).
This will reflect the size and complexity of each firm compared to the
powers currently available to UK regulators for the resolution of banks,
as well as Moody's forward-looking assessment of any further
changes to these powers. This assessment will also take into consideration
the political acceptability of further taxpayers' support for the
banking system in addition to the UK government's financial flexibility
to take on board further contingent liabilities.
2. Any upward pressure on firms' standalone ratings that
could offset or mitigate some of the downward pressure on the senior debt
ratings during the review period.
The long-term and, in some cases, short-term
debt/and or deposit ratings of the following institutions were placed
on review for possible downgrade:
Bank of Ireland (UK) plc (Baa3/P-3); Co-Operative Bank
plc (A2/P-1); Coventry Building Society (A3); Lloyds
TSB Bank plc (Aa3); Nationwide Building Society (Aa3/P-1);
Newcastle Building Society (Baa2/P-2); Norwich & Peterborough
Building Society (Baa2/ P-2); Nottingham Building Society
(A3); Principality Building Society (Baa2/P-2); Royal
Bank of Scotland plc (Aa3); Santander UK plc (Aa3); Skipton
Building Society (Baa1/P-2); West Bromwich Building Society
(Baa3/P-3); Yorkshire Building Society (Baa1/P-2).
The outlook on the Aa3 senior debt and deposit ratings of Barclays Bank
plc has been changed to negative from stable and the Aa2 senior debt and
deposit ratings of HSBC Holdings and HSBC Bank plc have been affirmed
with a negative outlook.
The A1 long-term senior unsecured debt and bank deposit ratings
of Clydesdale Bank remain on review for possible downgrade. The
rating was originally placed on review on February 16, 2011,
following the announcement of the review of the ratings of its parent,
National Australia Bank. The one-notch downgrade of National
Australia Bank on May 18, 2011, does not impact the ratings
of Clydesdale, however the A1 long-term senior unsecured
debt and bank deposit ratings remain on review and the review will now
focus on the level of systemic support incorporated into the ratings.
For a full list of firms' senior debt and deposit ratings (included
affected subsidiaries) and current standalone ratings see http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_133344
RATIONALE FOR REVIEWS FOR POSSIBLE DOWNGRADE
In line with recent financial institution rating actions in several European
countries, Moody's has placed under review for possible downgrade
the long-term ratings of UK financial institutions which -
in Moody's assessment - incorporate levels of government,
or systemic support in their ratings that the rating agency may now deem
to be too high for the evolving post-crisis environment.
"The reassessment is not driven by either a deterioration in the
financial strength of the banking system or that of the government.
It has been initiated in response to ongoing guidance from the UK authorities
(the Bank of England, the Financial Services Authority and the Treasury)
that banks that fail in the future should not expect capital injections
from the public purse," says Elisabeth Rudman, a Moody's
Senior Credit Officer and lead analyst for a number of UK banks.
The authorities have taken a number of legislative and other steps to
permit losses to be imposed on creditors as part of the going-concern
resolution of banks. "While we note -- and will take
into consideration -- the technical difficulties in resolving larger,
complex banks, we will also need to assess the likelihood of further
developments in this area over the medium term, given the very clear
determination of the UK government to put in place a resolution mechanism
that can also be applied to large, complex banks," says
Ms. Rudman.
Current levels of systemic support account for two to five notches of
uplift for the large UK banks and one to five notches of uplift for the
small to medium-sized financial institutions. Moody's
expects to retain a high level of systemic support uplift in the senior
debt ratings of the major UK banks, as the rating agency believes
that the regulators do not currently have all the tools necessary to resolve
such institutions without causing financial instability. Moody's
expects to retain a lower level of systemic support uplift in the ratings
of the small to medium-sized institutions; this level of support
is expected to vary based on the resolvability of each firm and will be
determined in the course of the review.
Moody's has placed the short-term ratings under review for
possible downgrade for those institutions for which the downgrade of the
long-term rating could potentially also lead to a change in the
short-term rating.
RATIONALE FOR NEGATIVE OUTLOOK
The ratings of Barclays Bank and HSBC Bank/ HSBC Holdings were not placed
on review for possible downgrade as these banks' ratings incorporate
a level of support that is currently in line with Moody's understanding
of the probability of systemic support for large, complex and systemic
financial institutions, leading to three and two notches of uplift
from the standalone ratings respectively.
However, Moody's has changed the outlook on the senior debt
and deposit ratings of Barclays Bank to negative from stable to reflect
the publicly stated intention of UK regulators to improve their resolution
powers for large, systemic institutions by allowing for burden-sharing
with senior debt holders. Moody's has affirmed the negative
outlook on the senior debt ratings of HSBC Holdings and HSBC Bank to reflect
this development.
METHODOLOGY USED
The principal methodologies used in this rating were Bank Financial Strength
Ratings: Global Methodology published in February 2007, and
Incorporation of Joint-Default Analysis into Moody's Bank Ratings:
A Refined Methodology published in March 2007.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
London
Elisabeth Rudman
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Johannes Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's reviews ratings of selected UK financial institutions for possible downgrade
