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 207.

    There are some countries with reliable & stable currencies & economies & some banks that are doing relatively well in those countries that can be supported by those countries' governments. Then there are the failing banks - elsewhere. Query: why don't the German banks just get on with it & buy the Spanish, Italian &/or Greek banks directly? Tell us why Robert. Tell us about cross-border M&A.

  • Comment number 206.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 205.

    201. Well I suppose other banks, institutions and investors seeking yield can be described as such. MBS. CDO etc certainly weren't sold to windows and orphans.

    190 As noted earlier crisi combination of misguided regulation, govt intervention & loose monetary policy.

    Moral hazard - US bailed out LTCM & Greenspan put. US banking has in recent decades been socialised. Failure of govt.

  • rate this

    Comment number 204.

    197 W

    Banks have no urgent need of deposits, they have the BoE shoveling ZIRP money into their maw to then use to buy sov debt at higher %. If banks needed deposits they would up savers%. This is systematic wealth stripping from the citizens on an unprecedented level. Only low interest rates available to borrowers are mortgages - designed to stop the housing market souring the banks asset ledger

  • rate this

    Comment number 203.

    199. Basle ii 2004 had 2 sign impacts 1. encouraged banks to alter behaviour by aking on gearing OBS whilst seemingly shifting risk it through securitisation. 2. drove one size fits all risk models in banking VaR.

    OECD heavily criticised perverse effects of Basle.

    198. Futures & fowards have been used for 500 years.

  • Comment number 202.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 201.

    184. stanilic
    `Are you suggesting that banks deliberately set about bankrupting themselves?'

    How else can sub-prime be explained?
    Sub-prime was hidden in AAA rated 'packages' to be sold on to suckers. Rating agencies doing a sterling job.
    The banks didn't bankrupt themselves, but everyone else.

  • rate this

    Comment number 200.

    "Are any British banks still Premier League?"
    I wish you could hear how hard I'm laughing!
    Nat West is just waiting for their application to to be approved.

  • rate this

    Comment number 199.

    To Comment 187 Basle I II were created to stop banks lending into risk areas without enough capital. In regard to British banks it was a Labour government who allowed the banks to disregard this rules and regulations, result 120% mortgages. Sorry before attacking the now government please review the past and then read Basle I and II correctly before place such a comment.

  • rate this

    Comment number 198.

    Surplus Value!!!

    I Promise to buy 10,000 barrels of oil for $100 in 3 months time. 3 weeks later the price of oil is $110.

    I have produced nothing, I have made nothing, all I own in life is a piece of paper. The that someone will buy from me for $100,000

    Surplus value!!!!

  • rate this

    Comment number 197.

    While interest rates are low, the banks will struggle to attract deposits. They will instead rely instead, on the riskier option of dealing on various international money markets. This makes them more like casinos than banks.. We need to face facts. Pay of the debt or remain prey to the money market and rating agencies. The view of risk is distorted when you are gambling with other people's money

  • rate this

    Comment number 196.

    Nat west are, they cannot account for peoples money, another bail out looms.

  • rate this

    Comment number 195.

    Ratings Agencies claim they only offer an opinion, but everybody appears to treat them as trusted advisors.

    With trusted advisors a Hedley-Byrne relationship may exist, opening Agencies up to liabilities from their opinions.

    Of course, if they're only offering opinions - why do they make so much money out of this and why don't we just ignore their opinions if they're not trusted advisors?

  • rate this

    Comment number 194.

    #193 Because the cheaters are simply exploiting the advantage given by their organisation. They have no interest in the organisation itself hence the short-changing of shareholders.

    Their aim is to get out quickly when everything goes pear shaped. All bonuses should be deferred for 5 years to deter short-termism.

    All golden good-byes should be scrutinised in the light of their conduct.

  • rate this

    Comment number 193.

    189 stanilic

    Cheaters only have a near field, no far horizon

  • Comment number 192.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 191.

    divorced from reality as in govt twisted banks arms to lend
    that it wasn't the banks that chose their own lending criteria
    that they aggressively pursued market share
    that they aggressively lobbied against regulation
    that neoliberal economics which your comments seem to endorse
    are vigorously anti govt regulation
    that if govt withdraws stimulus the private sector will risk their savings
    for jobs

  • rate this

    Comment number 190.

    "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."

    No mention of letting them fail. Why is that not an option? Still?

    It's almost as if the politicians have less power than the bankers... fTP, what say you?

  • rate this

    Comment number 189.


    And your point is?

    I get it: the banks bankrupted themselves. Dandy!

    They have to have done as I and squillions of others are providing them collateral to stay in business as they are too big to fail.

  • Comment number 188.

    All this user's posts have been removed.Why?


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