"Banks and building societies hit by Moody's downgrades"

Britain's beleaguered banks and building societies were dealt another blow today after a debt agency said the decreased likelihood of Government backing made them less credit-worthy.

Lloyds Banking Group, Santander UK, Royal Bank of Scotland, Co-operative Bank, Nationwide and seven smaller building societies saw their credit ratings slashed by Moody's Investor Service.

The move - which triggered a fall in banking shares on the London Stock Exchange - means the cost of borrowing for the affected financial institutions is likely to increase.

RBS, which saw its shares drop more than 3%, also came under pressure after a report in the Financial Times suggested it could require a further bailout from the Government.

The bank said it was "disappointed" that Moody's had not acknowledged its progress in strengthening its finances since 2008.

Moody's stressed its review did not reflect a deterioration in the financial strength of the banking system or the Government.

The move reflects a shift in Government policy to transfer risk from taxpayers to creditors, rather than deepening problems within the banks.

Elisabeth Rudman, senior vice president of the financial institutions group at Moody's, said: "Moody's has lowered the amount of support it incorporates into the institutions' ratings to reflect the overall weakening support environment."

Moody's said the downgrade comes after Government support was removed for the seven small institutions, which include the Norwich & Peterborough, Principality and Yorkshire building societies.

Elsewhere, support was reduced for the larger "more systemically important" institutions including Lloyds and RBS.

While the Government is "likely to continue to provide some level of support" to those banks, it is also "more likely now to allow smaller institutions to fail" if they become financially troubled.

Lloyds, Santander and Co-op Bank have had their ratings downgraded one notch, RBS and Nationwide a two-notch revision, while the seven building societies saw ratings cut by between one and five places.

However, Moody's said on the basis of stand-alone financial strength, five institutions - Co-op, Nationwide, Santander and Yorkshire and Principality building societies - have had their ratings increased.

Taxpayer-backed Lloyds, which is 40.2% state-owned, stressed that its stand-alone rating had not changed.

A Lloyds spokesman said: "It is important to note that both the stand-alone rating and short-term ratings remain unchanged. We believe this change will have minimal impact on our funding costs."

Meanwhile, it is understood RBS, which is 83% owned by the taxpayer, could be liable for another bailout if it fails a rerun of European banking stress tests.

RBS, which received the biggest bailout of the 2008 financial crisis, could see its protective cash buffers fall below regulators' requirements after exposure to eurozone debt is taken into account.

RBS has reduced its exposure to debt-laden nations including Greece and Italy, but it is feared that once so-called "haircuts" - effectively write-offs - are given, the bank will fail to keep up.

Courtesy of London Evening Standard