Moody’s Cuts U.K. Banking Outlook in Advance of New Rules

Moody’s Investors Service cut the outlook for the U.K. banking system to negative from stable, citing an increased credit risk from rules designed to prevent the use of taxpayer funds to support failed institutions.

Rules that are meant to boost the strength of failing banks by converting some bonds into regulatory capital and plans to build firewalls around consumer-lending units, outweigh the improved operating environment, according to a report from Moody’s today.

“In addition to the resolution and bail-in regime, U.K. banks also face continued exposure both to conduct and litigation charges and to other costs that might constrain profitability and erode capital,” analyst Carlos Suarez Duarte said. “We expect the standalone baseline credit assessments of most U.K. banks to remain stable because of the country’s stronger economic growth prospects.”

Britain strengthened safeguards to protect taxpayers and restore confidence in the country’s banks after the 2008 financial crisis culminated in the bailouts of Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc. Lenders also face stress tests later this year as the Prudential Regulation Authority, the U.K.’s financial regulator, seeks to examine their financial stability in times of crisis.

Stress Tests

“The fundamentals of the large U.K. banks are improving, and we do not expect any of them to fail the PRA stress test exercise due to their increased capital levels,” Suarez Duarte said by telephone. “We see as positive their efforts to improve their capital.”

Douglas Flint, chairman of HSBC Holdings Plc, Europe’s largest lender, warned yesterday that proposals to build firewalls around lenders’ consumer banks will cost the company “hundreds of millions of pounds” a year. Flint also said the proliferation of new regulations and a greater focus on financial crime and conduct was contributing to “disproportionate risk aversion” among employees.

Barclays (BARC) Plc, HSBC and RBS are among banks close to negotiating a settlement with Britain’s market regulator, the Financial Conduct Authority, over a currency-rigging probe, people with knowledge of the talks said last month.

“Regarding litigation in the U.S. and Europe, particularly Barclays, RBS and HSBC are exposed to a number of issues which are under investigation,” Laurie Mayers, Moody’s associate managing director for U.K. banks, said by telephone. “It’s unclear when we’ll start seeing the first conclusions of the foreign-exchange issue.”

Moody’s also has negative outlooks on the six-largest British banks, it said in the report.

To contact the reporter on this story: Stephen Morris in London at

To contact the editors responsible for this story: Simone Meier at Jon Menon

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