Moody's sent shockwaves through the global banking system and sparked fury in the City today, as the ratings agency threatened to slash the credit scores of more than 100 banks in the wake of Europe's debt crisis.
The agency has put the ratings of
114 banks in Europe under review as well as 17 investment banks. The move could hit 122 banks in total as nine of the investment banks are European-based. All of the UK's "big four" banks - HSBC, Barclays and state-backed Royal Bank of Scotland and Lloyds - face potential downgrade, affecting their ability to fund themselves in financial markets and potentially hampering an already weak recovery.
Michael Symonds, bank analyst at Daiwa Capital Markets Europe, said: "The banks are getting it from all sides at the moment - the ratings are only going in one direction. All things being equal, a lower rating will make it more expensive for them to finance themselves and make funding sources scarcer as some bond funds can only hold bonds of a certain rating."
One senior banker fumed: "This is yet another example of the ratings agencies pandering to the populist mood rather than giving markets and investors anything which is informed, useful or timely."
Moody's assault on the banks came two days after it slashed sovereign ratings on a host of European nations, including putting the UK's own AAA credit rating on negative outlook.
The ratings agency blamed "disrupted markets and a deteriorating, uncertain economic outlook" for its review, but warned that in some countries - such as Italy and Spain whose banks are under the most scrutiny - doubts over the creditworthiness of governments themselves is exacerbating the risks.
Investment banks in particular face headwinds including "more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions," Moody's added, diminishing long-term profits and growth prospects.
The European Central Bank papered over the cracks by pumping nearly 500 billion (£419 billion) into the European financial system in December, easing the pressure on hundreds of strugglers who took up three-year loans. But the European Banking Authority has called on the region's banks to raise 115 billion to bolster their finances to ward off a fresh storm.
Johannes Wassenberg, Moody's managing director of European banks, denied it was part of the problem and was providing "transparency" to the market. He said: "There is a lot of information assymetry out there between borrowers and lenders and we are reducing that assymetry."
Barclays slid 4.2p to 237.5p and Lloyds 0.66p to 33.27p. RBS shed 0.13p at 26.87p while HSBC fell 7.8p to 568.05p.
Rival agency Fitch was also downbeat on the UK's building societies today as it warned the sector faced continued pressure from longer-than-expected low interest rates, strong competition for retail funds and higher-than-average loan impairment charges, hampering their ability to lend.
