Moody’s has downgraded its outlook for UK banking from stable to negative due to incoming regulatory changes intended to avoid another taxpayer bailout.
Since the bailouts in 2008, the UK Government has been working on a raft of measures to guard against any bank failure putting the entire financial system at risk.
These include a new bank recovery and resolution regime, the introduction of bail-in capital, and the Independent Commission on Banking’s proposals for the retail arms of bank to be ringfenced and hold more capital.
Moody’s vice president Carlos Suarez Duarte says in addition to the impact of this regulation there is “continued exposure to both conduct and litigation charges and other costs that might constrain profitability and erode capital for some banks”.
He says: “[However], the key driver of the change in outlook to negative for the UK banking system is that the UK Government is now able to finalise the secondary legislation to implement the structural reforms relating to the UK resolution and bail-in regime and the related ringfencing framework.”
Because they do not pose a systemic risk in the event of failure, smaller banks and building societies have benefited less from implicit state support.
As a result of this, Moody’s expects the ratings of most smaller banks and building societies to remain stable.
Earlier this week, it was reported that HSBC chairman Douglas Flint had written to the Chancellor asking him to delay the implementation of the ringfence.