UK banks downgraded: What it means for you

Major UK banks and building societies have seen their credit ratings cut today.

Major British banks and building societies, including Lloyds, Royal Bank of Scotland, Nationwide and Santander have suffered a credit rating downgrade by the ratings agency Moody’s.

The downgrade is due to Moody’s view that the Government is unlikely to offer too much help should any UK lenders fall into trouble.

Too big to fail?

While the rating agency was keen to stress that this move was not due to the financial strength of the UK banking system – or the Government – declining, it highlighted that the authorities had removed systemic support for seven smaller financial firms, as well as reducing the support available (by varying degrees) to five larger firms.

In Moody’s’ view, this means that the Government is more likely to allow financial firms to fail in the future, though it suggested some level of support will still be there for ‘systemically important financial institutions’.

The downgrades

Let’s take a look at the affected firms.

The following building societies have also had their ratings cut by between one and five notches: Newcastle BS, Norwich & Peterborough BS, Nottingham BS, Principality BS, Skipton BS, West Bromwich BS, Yorkshire BS.

While the actual ratings may seem a bit oblique, the important thing to take from this is that some of the most significant lenders in the UK have taken a whack on their credit rating.

So what difference will that make to you and me?

Maintaining a healthy credit rating

Think about your own credit rating. If it’s spotless, then you’ll qualify for the best deals around, whether that means a market-leading credit card, or the lowest available rates on a mortgage. (To check your own credit rating, you can get a free trial with Credit Expert via lovemoney.com.)

However, if you have the odd black mark on your record – perhaps you missed a mortgage or credit card payment – then things get a little more complicated. You may not be able to get the best deals around, and have to settle for more expensive credit, a higher rate of interest.

The principle is the same with banks. They need to borrow too, and it’s their credit rating that tends to dictate the price they have to pay for that credit.

So if their ratings are being downgraded, that means getting hold of credit is likely to cost them a bit more in the future.

Will that cost be passed on to you when you borrow from those banks?

What it means for you and me

The full impact of these downgrades varies, depending on which expert you listen to. But there is no doubt that these banks and building societies will find it more expensive to access cash via the usual routes. And yes, there is a danger that those costs will be passed on to us, the customer. That means higher rates of interest on credit cards, loans and mortgages – just what we all need.

However, there is a counterbalance to that argument, in the form of the latest round of quantitative easing, ever-so-coincidentally announced yesterday by the Bank of England. This means that banks will again be able to flog their assets to the Bank of England to raise funds. So while QE2, as it’s been dubbed, may not succeed in getting lenders to lend more, it may at least limit the damage of this downgrade. Only time will tell.

However, there is also the question of confidence. This downgrade again highlights the debate of whether any bank or building society is – or should be – ‘too big to fail’. Where do you feel safest putting your cash?

Ratings troublemakers

Finally, it’s worth remembering that it was ratings agencies like Moody’s that were at the heart of the financial crisis, happy to sign off AAA ratings for any old rubbish before them, because they didn’t really understand what it was that they were rating.

It seems perverse that Moody’s is now in a position to make our recovery from that monumental cock-up even more protracted.

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