Ratings agency Moody’s cut its rating on Ulster Bank owner Royal Bank of Scotland by two notches, downgraded Lloyds by one notch and cut its ratings on Santander UK, Co-Operative Bank, Nationwide Building Society and seven other smaller British building societies.
Banks had been on review for possible downgrades as part of a trend where state support for lenders is being reduced, and reforms proposed last month by Britain’s Independent Commission on Banking (ICB) were also expected to have a negative impact.
The ICB proposed ring-fencing the retail arms of top British banks from their riskier investment banking units, and said British banks should hold more capital.
“The market’s central expectation around the ICB impact had been for a two-notch downgrade across the board, so it’s better than expected,” said Gareth Hunt, analyst at Investec.
But concern is growing that banks may need more capital as part of a wider European move to shore up the industry to tackle a debt crisis and restore investor confidence. The EU plans to present a plan for member states to co-ordinate a bank re-capitalisation.
British finance minister George Osborne said the country’s banks remained well capitalised and in better shape than many of their European rivals, who face bigger losses on holdings of peripheral eurozone debt.
“I am confident that British banks are well capitalised, they are liquid, they aren’t experiencing the kind of problems that some of the banks in the euro zone are experiencing at the moment,” Mr Osborne told the BBC.
RBS, which is 83% owned by the government, said it remained one of Europe’s most strongly capitalised banks, responding to a Financial Times report citing concerns in government circles that it might need more state aid.
RBS’s capital position came under strain in a stress test of lenders in the summer, raising fears it would need at least £5 billion (€5.8bn) more in a widespread recapitalisation. But analysts said its solvency was stronger than shown in the test, which included historical toxic losses and ignored a reduction in its balance sheet.