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Announcement:

Moody's to reassess systemic support for UK financial institutions

07 Apr 2011

London, 07 April 2011 -- Moody's Investors Service says today that over the next few weeks, it will begin a reassessment of the systemic support assumptions that it currently incorporates into its senior debt ratings for UK financial institutions. This follows on from Moody's announcement on March 24th of a reassessment of support assumptions for smaller European financial institutions.

The reassessment announced today in the UK will focus on the high systemic support assumptions currently incorporated in the senior debt ratings of small to medium-sized UK financial institutions, as well as, on a case-by-case basis, the level of systemic support incorporated in the large, complex financial institutions.

Moody's includes systemic support in the ratings of nineteen UK financial institutions, with 1-5 notches in the senior debt ratings. This reassessment could trigger negative outlooks , reviews for possible downgrade, or downgrades for some ratings and will be taking into consideration Moody's expectations on how the relevant banks' standalone credit strength will develop.

RATIONALE FOR THE REASSESSMENT

The key driver for Moody's reassessment in the UK is the large number of financial institutions, particularly small to medium-sized firms, that have high levels of support in their ratings and which, in Moody's view, are unlikely to be deemed "systemic" over the medium term. There are currently significantly higher levels of systemic support incorporated in the senior debt ratings of UK financial institutions than was the case pre-crisis. UK banks benefit from up to five notches of uplift in the senior debt ratings, whereas the pre-crisis levels of support were typically 0 -- 1 notches for the small to medium-sized banks and two notches for the largest banks. Moody's has stated in several of its publications that it intends to phase-out this 'extraordinary' support from its senior debt ratings of UK banks. Most recently, Moody's announced a systematic reassessment of support assumptions for smaller European financial institutions (see "Moody's Reassesses Systemic Support for Senior Debt of Smaller European Financial Institutions: Spanish Bank Ratings Downgraded as a First Step", 24 March 2011).

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 against the background of ongoing guidance from the UK Tripartite 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. 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.

Equally, the UK authorities have made it clear that they do not view the banking sector as a "zero failure" system. Statements suggest a clear recognition that the need to avoid providing taxpayer money to banks in future should be balanced against the need to maintain financial stability. The authorities have made clear that the current resolution tools (namely, the 2009 Banking Act) are only suitable for the resolution of small to medium-sized banks, but that they will continue to work with European and international bodies to address the resolvability of large, complex banks. Moody's will therefore continue to assume some systemic support for the major UK institutions, at least pending greater clarity around the development of the resolution framework in Europe and elsewhere.

TIMEFRAME FOR REASSESSMENT

Consequently, and following on from its announcement on 24 March, within the next few weeks Moody's will begin reassessing what it considers to be the appropriate level of systemic support in the senior debt ratings. If this leads to ratings being placed under review for possible downgrade, then the review process could take up to three months. At the same time, if Moody's also identifies upward pressure on the standalone ratings of some banks -- which could offset or mitigate some of the downward pressure on the senior debt ratings -- the rating agency will also review these standalone ratings during that period.

POTENTIAL IMPACT ON LARGE, COMPLEX BANKS

As indicated in the March 2010 announcement, (see "Phasing out Extraordinary Support Assumptions from UK Bank Ratings", March 2010) Moody's intends, for now at least, to continue to assume some level of systemic support for senior debt issued by larger financial institutions. Pre-crisis, such support assumptions accounted for an average of two notches of rating uplift. Moody's expects to be able to make a more informed assessment of this in the second half of 2011, once there is greater clarity regarding the treatment of SIFIs (Systemically Important Financial Institutions) and future resolution mechanisms within Europe.

In the meantime, negative outlooks will be used, where appropriate, to indicate the medium-term pressure on some of these senior debt ratings as a consequence of proposed changes to resolution frameworks. In addition, the rating agency will, as announced, continue to assess the support likely to be available to any financial institution (large or small) on a case-by-case basis, where the probability of the authorities being able and willing to resolve problems through means other than financial support appears to be increasing. The case-by-case assessments will be particularly relevant for those large banks in the UK which currently have very high levels of crisis support incorporated in the senior debt ratings. This refers to the levels introduced to reflect the 'extraordinary' support provided during the crisis and which far exceed levels assumed pre-crisis.

The rating agency's assessment will reflect the medium-term time horizon of our ratings, and will take account of: (i) the strong willingness of the UK authorities to improve the resolvability of large banks over the medium term; (ii) the level of government capital received by some banks and the timeframe for the government to exit these investments over the same horizon; (iii) the need to reflect the changing environment by returning at some point to pre-crisis levels of support in our ratings; and (iv) the direction of the Independent Commission on Banking (ICB), which is reviewing structural changes to the banking system that are expected to have the greatest impact on the large banks. The ICB will outline an interim proposal on 11 April. As mentioned above, Moody's would also balance these factors against the timeframe for the potential recovery of the standalone financial strength ratings of the banks.

Financial institutions covered by this reassessment are as follows: Bank of Ireland (UK) plc; Bank of Scotland plc; Barclays Bank plc; Clydesdale Bank plc; Co-Operative Bank plc; Coventry Building Society; HSBC Holdings plc; HSBC Bank plc; Lloyds Banking Group; Nationwide Building Society; Newcastle Building Society; Norwich & Peterborough Building Society; Nottingham Building Society; Principality Building Society; Royal Bank of Scotland Group; Santander UK plc; Skipton Building Society; West Bromwich Building Society; Yorkshire Building Society;

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 to reassess systemic support for UK financial institutions
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