Are any British banks still Premier League?


Ahead of Thursday evening's announcement from Moody's that it is downgrading 15 global banks and securities firms, I spoke to the chief executive and chairman of a couple of very large banks. And they both said that the problem with Moody's analysis was that it was backward looking.

They both knew their respective banks would be downgraded, so they were getting their defence in early. But Moody's main rationale for all these downgrades - of US, Swiss, French, German and British banks - is that investment banking is a riskier business than many might have thought a few years ago.

Really? Some would certainly say that is a statement of the egregiously bloomin' obvious.

The most interesting thing about the Moody's analysis is that it, in effect, creates three new categories of global banks, the banking equivalent of the Premier League, the Championship and League One.

Of our biggest banks, only HSBC is in this Premier League. Barclays is in the Championship and Royal Bank of Scotland is in League One.

So what will be the effect of the downgrades? Well, they might push up the cost of borrowing for the banks fractionally. But it would be odd if the impact was terribly significant - largely because they have all been downgraded, and those who control vast pots of cash have to put their money somewhere.

In theory, most vulnerable to the risk that borrowing will become a bit harder and pricier are those in the bottom category of banks, which includes RBS. But RBS can take small comfort that some very big banks - notably Bank of America Corporation and Citigroup of the US - have lower ratings than it does.

Perhaps more importantly, its main operating subsidiary retains a long-term rating that would put it in the Championship rather than League One, although the short-term rating of this subsidiary has been downgraded by a notch, which the bank regards as of some significance.

Probably most reassuring about RBS is that its most recent balance sheet shows that its funding needs for the next year are minimal: it has cash and liquid resources of more than £150bn, compared with short-term funding needs (that's money that needs to be raised over the next year) of just £80bn.

So, the downgrade should not embarrass RBS in any terribly serious way.

By the way, even though Lloyds is not a global bank, it has suffered a modest downgrade too - and it would be in the same category as Barclays, the equivalent of the Championship, though a tiny bit higher up the table.

Finally, it is worth remembering that the Bank of England and HM Treasury have announced two new schemes to provide copious amounts of cheap loans to British banks, which can be seen as insurance against the downgrades leading to any kind of renewed credit crunch (see this blog for more on all this).

After all this, if you are worrying that British banks don't look as robust as you might like, I would direct your attention to Thursday's publication of how much capital Spanish banks may need to raise, as per the assessment of consultants hired by Spain's government.

They say Spain's banks need between 51bn euros (£41bn) and 62bn euros of additional capital as protection against future losses. Now, although that is less than many analysts think is needed, it is still a fair chunk of change, equivalent to around 6% of Spanish economic output or GDP.

No need to panic, because - as you will recall - Spain has already secured an agreement from other eurozone governments that they will lend it 100bn euros from their bailout funds to cover the costs of strengthening its banks.

So, unless the Spanish economy and housing market were to go from bad to meltdown in the coming months, Spain's banks should be endowed with sufficient additional capital to weather the coming storm (the so-called adverse case in the stress tests is for Spanish house prices to fall 19.9% this year, 4.5% next year and 2% the year after, and for Spain's GDP to contract by 4.1%, 2.1% and 0.3% in successive years).

For aficionados of financial gore, Oliver Wyman says that in the coming three years, and were the adverse scenario to become true, Spanish banks would lose up to 270bn euros collectively, on top of 150bn euros of credit losses since 2007. Or to put it another way, Spain's banks over seven years would lose a sum equivalent to two and a half times the entire annual output of Portugal. Yes, Spain's savings banks are a bit of a mess.

There are two caveats. First, these evaluations of losses faced by the Spanish banks are so-called "top down". Or to put it another way, the two firms carrying out the assessment, Roland Berger and Oliver Wyman, have not looked at the quality of individual loans. In the words of Wyman, they have instead considered "the different historical performance and asset mix for each institution at aggregate levels, applying conservative but similar estimates of loss behaviour across banks when more detailed bank-specific loss drivers are not available."

Or to put it another way, if this particular boom and bust turns out to very different from anything experienced in Spain over the past 30 years - and it might just be - then losses for banks could be rather greater than the consultants have estimated.

Also, the experience of Ireland's banks - where losses rose exponentially for month after relentless month following the 2008 crash - shows how foolish it is to ever assume that you've touched bottom when a massive debt-financed property bubble has been pricked.

For Spain there remains the big imponderable of whether the Spanish authorities will insure its banks against further losses on their dodgy loans or physically remove the dodgy loans and put them into a new bad bank. What happened in Ireland suggests that formal transfers of bad assets to a new institution can be very expensive indeed.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 27.

    "So, the downgrade should not embarrass RBS in any terribly serious way".

    sorry I was wrong, apparently you can polish a turd.

  • rate this

    Comment number 26.

    I wonder what a Moody's assessment would look like if all tax payer backed support was removed from these private companies whom happen to be banks?

    They would, of course, all reduce to junk ratings and the whole system would collapse immediately.

    So why do governments still allow banks that are anything other than solvent without any tax payer help to keep profits in private hands?


  • rate this

    Comment number 25.

    what you don't mention is the outlook for all the British banks is Negative, which means further downgrades possible in the next 3 months.
    In that sense the rating agencies are forward-looking also!
    This has always been about USA trying to destroy European capital markets and indulging in a bit of asset buying at bargain prices.
    Their turn will come (in spades).

  • rate this

    Comment number 24.

    #21. coram-populo-2010

    I make no distinction between banks and mutuals.

    They both require customers to pay them interest and not go bust.
    And if they do go bust then the assets seized by the banks, mutuals, should cover the loans.

    To be useful the rating agencies would have to rate individual customers.
    All of them...

  • rate this

    Comment number 23.

    Mr Peston, can you say, is any of this saga (of banks. lenders, sovereign debts etc)) due to lenders AND banks being too big? too big to measure, too big to fail, (too big for their boots?) Both - lenders & banks - hide their credit worthiness (or lack of it) behind auditors and creative accountants and inflated asset (esp property) valuations... So when asset bubbles. esp. property, burst then..

  • rate this

    Comment number 22.

    @ 8 Agent Purr. < This. Capitalism is not sustainable with a framework that assumes growth (3 per annum) is universal and guaranteed. David Harvey makes this point about the failure of economics based on capital accumulation in his book 'The Enigma of Capital'. Add to this climate issues re ocean acidification and we have a meltdown scenario. Shame Greece missed the opportunity start the fall

  • rate this

    Comment number 21.

    @20 'prudeboy'
    Are you referring to the remaining mutuals?

  • rate this

    Comment number 20.

    Self evidently banks are only ever as good as their customers.

    The best bank in the world would never lend.
    Obviously it would not thrive.

    The worst bank would lend willy nilly.

    In between are the real banks. They depend upon real customers doing well.

    As the wide mouthed frog said:
    You don't see many of them around today - do you?

    Will Gideon save us all? Get the economy going? HaHaHaHaHa.

  • rate this

    Comment number 19.

    @17 'UnionRep'
    Perhaps you are misled because it's not the EU super rich that you describe who are buying London or most of Britain. Although their companies may be registered in Europe via a company based elsewhere.

    Banks hold enormous assets in land and property - yet they created the liquidity problem that taxpayers are funding. A perfect business model - don't you think?

  • rate this

    Comment number 18.

    Rating Agencies are a thoroughly discredited sector.

    Reference: Sub-Prime derivatives 2006/7 et al.

  • rate this

    Comment number 17.

    I wouldn’t worry too much about Spanish banks holding dodgy property debt.

    The UK still has a massive property bubble in place; orders of magnitude larger than Spain especially in London where most of the EU’s super rich are busily inflating it further.

  • rate this

    Comment number 16.

    Its the ratings agencies who really need rating & the undoubted conclusion is - not fit for purpose
    their ratings have zero predictability value & only tell you what has already happened, if you don't know that then you shouldn't be investing in the first place, all they do is make the nervous more jittery which does no one any good

  • rate this

    Comment number 15.

    Blah, blah dodgy banks - plus blah, blah dodgy loans.

    I think taxpayers have heard enough, and suffered enough. Is there no end to these credit agencies and banks whinging on and on?

    Put a sock in it all of you - but use your own cashmere socks. Thanks.

  • rate this

    Comment number 14.

    I wouldn't take too much notice of Moody's pitch for tabloid space... most of us were aware of this way-back.

    Welcome to the party!

  • rate this

    Comment number 13.

    The adverse scenario for Spanish banks seems very conservative. I believe the size of the Spanish Mortgage market is about Eur 650 billion , with direct loans to house builders a further 300 billion. Is 10% of mortgages went bad ( and I suspect it will be higher by the end) thats 65 billion. 3 in 10 house builders are in arrears - a total of 155 billion, which is still conservative.

  • rate this

    Comment number 12.

    Are we now expected to view Banking as a spectator sport?No different from a Football Match or any other sport?
    Does it really matter which division a bank occupies?
    If they learn not to borrow beyond their means that has to be good.
    Such a pity they encouraged too many people to live well beyond their means.

  • rate this

    Comment number 11.

    How biased can this be? So our banks have been downgraded but "look at those Spaniards! how bad in comparison". This is a lame way of reporting what should be bad news for the cost of borrowing in the UK. As usual you've made a point of blaming others and pointing that others are in worse shape. At the same time forgetting about the humongous bail out that British banks already enjoyed in 2008/09.

  • rate this

    Comment number 10.

    I can not abide the ratings agencies, if they had done their job properly in the first place we would not be in the mess we are now. They are like a bunch of inept prison guards who having fallen asleep on duty and let all the criminals go, now embarrassed, they guard the few remaining decrepit ones who failed to get away with overzealous vigour. Too damn late.

  • rate this

    Comment number 9.

    Is this the same company that was cheerfully rating sub-prime junk bonds as triple A rated ?
    With the result a lot of banks jumped on the gravy train and caused the whole economic meltdown in the first place

    Yeah lets listen to them.

  • rate this

    Comment number 8.

    Says it all really, but is only diverting attention from the fact that the ponzi scheme of fiat money is coming to it's natural invevitable collapse. Gov's cannot solve the problem because they are trying to maintain a flawed system.

    You cannot fight the laws of mathematics and exponential debt


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