Banks face higher funding cost after credit ratings reduced
Standard & Poor’s has cut its ratings on 15 big global banks.
Royal Bank of Scotland and Lloyds were the only European banks to have their short-term credit ratings cut – a reduction to A2 from A1.
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Hide AdAnalysts said that when this happens, it can be a step change that increases funding costs.
Lloyds said it did not expect the rating action to have a material impact on its funding position, as the bank funds itself through subsidiaries that are unaffected.
Long-term rating changes included one notch downgrades on Barclays, HSBC, Bank of America, Citigroup, Goldman Sachs and UBS.
Analysts at Mediobanca said in a note: “The downgrades confirm ongoing concerns on how fast banks can be impacted by the current challenging environment.”
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Hide AdWhile the downgrades were driven by a revision of the agency’s internal models and not because of a change in the banks, they will have a real impact on funding costs for the sector, already on edge because of Europe’s debt crisis.
Andrew Fraser, investment director at Standard Life, said: “It will likely raise concerns about their short-term funding because they will be sidelined by money-market funds who are the traditional buyers of that short-term paper.
“The timing of the statement is perhaps more significant than its content because it comes at a time when liquidity is under pressure at banks.”
European Union talks to save the single currency limped ahead this week, with a key functionary saying the region was entering a “critical period” of 10 days to come up with plans to stave off the crisis.
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Hide AdAhead of Standard & Poor’s downgrades, rival Moody’s said it could downgrade the subordinated debt of 87 European banks. Moody’s is concerned that Governments are too cash-strapped to bail out holders of riskier bank debt.
Standard & Poor’s move could force banks to put up more scarce collateral.