Fitch ratings agency has downgraded five British and European banks and placed 12 major European and US banks on watch, citing their increased vulnerability to the heightened stresses on the global financial system.
Concerns that governments are less likely to come to the rescue of financial institutions had prompted Fitch to downgrade its outlook for Britain’s Royal Bank of Scotland Group, Lloyds Banking Group, Swiss lender UBS, Germany’s Landesbank Berlin and Berlin-Hannoversche Hypothekenbank, the agency said on Thursday.
Fitch is the second major credit rating agency in less than a week to slash its ratings of Royal Bank of Scotland and Lloyds. Last week, Moody’s cut its ratings on the two UK banks for the same reason.
“The banking system is not only very large relative to the UK economy, but there is also more advanced political will to reduce the implicit support for the country’s banks,” Fitch said in a statement explaining its downgrade of the British lenders.
It lowered its long-term ratings for the two large bailed-out banks by two notches to A from AA-.
The credit rating agency dropped Swiss lender UBS one notch to A from A+ and Germany’s Landesbank one notch to A+ from AA-.
The moves follow similar actions taken against Italian lenders.
Among the 12 banks placed on negative watch were Barclays Bank, BNP Paribas, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and Societe Generale, some of the world’s largest banks, with substantial dependence on financial trading operations for income.
“The placement on Rating Watch Negative… reflects Fitch’s view that these institutions’ business models are particularly sensitive to the increased challenges the financial markets are facing,” Fitch said in the statement on Thursday.
“These actions are not tied to any specific earnings information as this review has been ongoing for some time,” the ratings agency said.
“The review is motivated by Fitch’s evolving concerns about aspects of these business models and the structural challenges they face, particularly during periods of market stress.”
Fitch said it expected to make a decision on possible ratings downgrades “within a short time frame and take corresponding rating actions where warranted.”
The ratings firm explained that since the financial crisis in 2008, policymakers had moved to limit or preclude the use of taxpayer funds to rescue banks in a way that would protect their creditors.
While the creditor protection is still implicit in the eurozone as governments seek to maintain confidence during the ongoing Greek debt crisis, for the two British banks and UBS, Switzerland’s biggest bank, which are outside the eurozone, the policy change has taken place, Fitch explained.
With the two German banks, the downgrade was mainly to bring their ratings in line with comparable banks.
“The tension is that this policy transition was primarily designed for the ‘next crisis’ while officials continue to grapple with the current one,” Fitch noted.
Fitch said its action served to highlight that the risks that remained in the markets were similar to the stress that banks and the global financial system felt during the 2008 crisis.
“Fitch recognises that these institutions are diverse both in terms of product scope and geography and are among the largest in the world.
“However, recent history demonstrates that large banks can fail.”