Moody's downgrades the senior debt and deposit ratings of 12 UK financial institutions

LEVELS OF SYSTEMIC SUPPORT: UK FINANCIAL INSTITUTIONS FALL INTO THREE GROUPS

Moody's reassessment assumes a decrease in the probability that the UK government would provide future support to financial institutions if needed. This follows ongoing guidance from the UK Tripartite authorities (the Bank of England, the Financial Services Authority and the Treasury) that the government is more likely in the future to make greater use of its resolution tools to allow burden sharing with senior bondholders. "Therefore, Moody's has lowered the amount of support it incorporates into the institutions' ratings to reflect the overall weakening support environment," adds Rudman.

The rating downgrades position the ratings of UK financial institutions into three groups:

Banks with a very high likelihood of support: two to three notches of systemic uplift.



This group includes the four large clearing banks, which have large market shares of loans and deposits, a significant share of the clearing system and also (in the case of RBS, Barclays and HSBC) have complex large cross-border trading and derivative books . The notches of support uplift have been reduced (i) to three from four for Lloyds; and (ii) to three from five for RBS. There is no change to the ratings of Barclays and HSBC, which maintain the existing levels of three and two notches of rating uplift, respectively.

Banks with a moderate or high likelihood of support: one notch of systemic uplift.

This group consists of Nationwide, Santander UK, Co-operative Bank and Clydesdale Bank. These institutions have nationwide networks and a smaller, but still important, role in the payments system. Nationwide and Santander have large market shares of nationwide deposits and loans, which places them in the category of "high" likelihood of support. However, the simpler business model of all these institutions means they are relatively "more straightforward" to resolve and therefore support is limited to one notch.

Institutions with a low or no likelihood of support: no systemic uplift.

This group consists of the smaller rated building societies. Those affected by today's rating action are Newcastle, Norwich & Peterborough, Nottingham, Principality, Skipton, West Bromwich and Yorkshire. Moody's considers that there is insufficient certainty surrounding the likelihood and extent of support available over the medium-term to the senior creditors of rated building societies smaller than Nationwide, which all have very small nationwide market shares. Therefore, there is no rating uplift incorporated for systemic support from their respective standalone credit strength ratings.

STANDALONE FINANCIAL STRENGTH



The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government. In fact, the standalone ratings of 5 institutions have been upgraded in separate announcements made today (Co-Operative Bank) and over the past few months (Nationwide, Santander UK, Yorkshire, and Principality ). These institutions are primarily those that have seen some improvement in their credit profile in the past 12 months and where we have also concluded that the institution is unlikely to be directly affected by any further material deterioration in the European financial markets -- primarily, smaller, domestically-focused institutions with limited reliance on wholesale funding.

However, these improvements in standalone financial strength have not been sufficient to offset all of the downward rating pressure from lower systemic support.

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(Source- Moody's Investors Service)

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