No fewer than fourteen UK banks and building societies placed on review for downgrade by Moody’s on Tuesday — plus negative outlooks for Barclays and HSBC:
Bank of Ireland (UK) plc (Baa3/P-3); Co-Operative Bank plc (A2/P-1); Coventry Building Society (A3); Lloyds TSB Bank plc (Aa3); Nationwide Building Society (Aa3/P-1); Newcastle Building Society (Baa2/P-2); Norwich & Peterborough Building Society (Baa2/ P-2); Nottingham Building Society (A3); Principality Building Society (Baa2/P-2); Royal Bank of Scotland plc (Aa3); Santander UK plc (Aa3); Skipton Building Society (Baa1/P-2); West Bromwich Building Society (Baa3/P-3); Yorkshire Building Society (Baa1/P-2).
The outlook on the Aa3 senior debt and deposit ratings of Barclays Bank plc has been changed to negative from stable and the Aa2 senior debt and deposit ratings of HSBC Holdings and HSBC Bank plc have been affirmed with a negative outlook.
Now, you could read this as another sign that the UK’s willingness to resolve big banks and, especially, bail in their senior debt, is starting to feed through the system.
We’re not sure though. Back to Moody’s:
Current levels of systemic support account for two to five notches of uplift for the large UK banks and one to five notches of uplift for the small to medium-sized financial institutions. Moody’s expects to retain a high level of systemic support uplift in the senior debt ratings of the major UK banks, as the rating agency believes that the regulators do not currently have all the tools necessary to resolve such institutions without causing financial instability. Moody’s expects to retain a lower level of systemic support uplift in the ratings of the small to medium-sized institutions; this level of support is expected to vary based on the resolvability of each firm and will be determined in the course of the review.
The ratings of Barclays Bank and HSBC Bank/ HSBC Holdings were not placed on review for possible downgrade as these banks’ ratings incorporate a level of support that is currently in line with Moody’s understanding of the probability of systemic support for large, complex and systemic financial institutions, leading to three and two notches of uplift from the standalone ratings respectively.
However, Moody’s has changed the outlook on the senior debt and deposit ratings of Barclays Bank to negative from stable to reflect the publicly stated intention of UK regulators to improve their resolution powers for large, systemic institutions by allowing for burden-sharing with senior debt holders. Moody’s has affirmed the negative outlook on the senior debt ratings of HSBC Holdings and HSBC Bank to reflect this development.
So there is still a lot of uncertainty — confusion if you will — over actual regimes to guide the capital structures of banks through a burden-sharing, even if it’s clear that senior debt will play a role.
Which is the wrong way round, surely? If winding down a large complex bank is difficult — i.e. it’ll be hard to convert investors’ holdings of the bank’s debt into its equity — then it will be really difficult to get the point of converting senior debt into equity. It’s right there at the top of the capital structure.
Never mind the senior, the UK remains locked to its banks if no effective resolution regime materialises.
How do you say bail-in in Swedish? – FT Alphaville