Ratings blow should not affect bank customers – yet

BUSINeSS borrowers and millions of mortgage payers face the prospect of higher interest rates and an even tighter loan shortage regime as a result of ratings downgrades announced by credit ratings agency Moody’s last night.

The announcement, which came after US markets closed last night, reflects the agency’s concern over the exposure of these banks to the eurozone. But ahead of the announcement, the Dow Jones index had plunged 250 points – or almost 2 per cent.

The downgrades – further evidence of the continuing apprehension over financial prospects in the eurozone de- spite declarations of support at the G20 summit in Mexico earlier this week – could result in banks having to find tens of millions of pounds in higher funding costs with the strong likelihood that these would then be passed on to customers in the form of higher interest rates for borrowers.

Banks are already under increasing regulatory pressure to strengthen their balance sheets and reserves in the wake of the 2008-9 financial crisis. The downgrade will almost certainly push them in a more cautious direction.

Broadly speaking, the lower a bank’s credit rating, the harder it is for them to borrow money at reasonable rates.

While the downgrades to UK banks were widely expected and less severe than some had feared, the concern is that Moody’s has also warned it is putting some banks on negative watch – meaning that further rating downgrades could be on the way. So while an immediate knock-on effect on bank customers is very unlikely, it is this latent threat that will worry banks and their customers.

The move will be particularly disheartening for RBS which has already significantly reduced its exposure to Greece. But it is the fear of contagion to other countries across the eurozone that has prompted Moody’s.

The move will also cast a shadow over the £80 billion of additional funding promised by the Bank of england to UK banks on the condition that they lent on the money to business borrowers.

Moody’s is one of the world’s three major credit rating agencies which measure the financial health of governments and institutions. The other two are Fitch and Standard & Poor’s.

It is likely they will follow in the coming weeks and months.