UK banks will not face a downgrade based on the Independent Commission on Banking’s report, published earlier this week, says Moody’s.
The ratings agency issued a warning in April that the contents of the report could signal a downgrade for the banks if the implication was that they could no longer rely on bailouts.
While Moody’s has confirmed that the report will not have any immediate effect on the credit-worthiness of UK banks, it has issued a further warning that, in their current form, the proposals could affect bondholders.
“If implemented in their current form, the proposals would have credit-negative implications overall for bondholders of the largest UK banking groups,” the agency says.
These negative implications stem from the 7-10% loss-absorbing capacity proposed in addition to the 10 per cent Core Tier 1 capital ratio. If the additional capacity is a result of “senior unsecured debt to be bailed in”, this is likely to affect bondholders.
Moody’s review of the sector remains ongoing and it will continue to assess the “systemic support” UK banks can expect to rely on.
Rather than representing a positive assessment of the ICB report, Moody’s has indicated that a downgrade at this time has been avoided based on the assumption that the contents of the report will change over time.
Elisabeth Rudman, the senior vice-president in Moody’s financial institutions group, says the decision was based on the report being a “recommendation”.
She says the government will need to “formally accept the proposals”, which will then take a “lengthy” drafting process.
Rudman says the length of the drafting process and the implementation period may change the final measures.
A separation of the retail and investment divisions of UK banks would lead Moody’s to assign separate ratings for ring-fenced and non-ring-fenced banks.
The review praised the core tier ratio proposals of 10 per cent as “a credit positive” move since it would place UK banks ahead of Basel III standards.