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Moody's reviews ratings of selected UK financial institutions for possible downgrade

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Moody's Investors Service has today announced rating reviews, outlook changes and rating affirmations across 18 UK financial institutions whose debt and deposit ratings incorporate an assumption of support from the UK government (commonly known as systemic support). The ratings of 14 of these institutions (listed below) are being reviewed for possible downgrade. This follows Moody's announcement on 7 April 2011 that it would reassess the levels of systemic support incorporated in the senior debt ratings of UK financial institutions in order to align their ratings with the changes to systemic support that are evolving in this post-crisis environment.


During the review process, which will likely take around three months, the rating agency will focus on:


1. The extent of support that should be incorporated into each institution's ratings, taking into account how difficult it would be for regulators to deal with a failure of the institution (in other words, the "resolvability" of the institution). This will reflect the size and complexity of each firm compared to the powers currently available to UK regulators for the resolution of banks, as well as Moody's forward-looking assessment of any further changes to these powers. This assessment will also take into consideration the political acceptability of further taxpayers' support for the banking system in addition to the UK government's financial flexibility to take on board further contingent liabilities.


2. Any upward pressure on firms' standalone ratings that could offset or mitigate some of the downward pressure on the senior debt ratings during the review period.


The long-term and, in some cases, short-term debt/and or deposit ratings of the following institutions were placed on review for possible downgrade:


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.


The A1 long-term senior unsecured debt and bank deposit ratings of Clydesdale Bank remain on review for possible downgrade. The rating was originally placed on review on February 16, 2011, following the announcement of the review of the ratings of its parent, National Australia Bank. The one-notch downgrade of National Australia Bank on May 18, 2011, does not impact the ratings of Clydesdale, however the A1 long-term senior unsecured debt and bank deposit ratings remain on review and the review will now focus on the level of systemic support incorporated into the ratings.


For a full list of firms' senior debt and deposit ratings (included affected subsidiaries) and current standalone ratings see http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_133344


RATIONALE FOR REVIEWS FOR POSSIBLE DOWNGRADE


In line with recent financial institution rating actions in several European countries, Moody's has placed under review for possible downgrade the long-term ratings of UK financial institutions which - in Moody's assessment - incorporate levels of government, or systemic support in their ratings that the rating agency may now deem to be too high for the evolving post-crisis environment.


"The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the government. It has been initiated in response to ongoing guidance from the UK authorities (the Bank of England, the Financial Services Authority and the Treasury) that banks that fail in the future should not expect capital injections from the public purse," says Elisabeth Rudman, a Moody's Senior Credit Officer and lead analyst for a number of UK banks. The authorities have taken a number of legislative and other steps to permit losses to be imposed on creditors as part of the going-concern resolution of banks. "While we note -- and will take into consideration -- the technical difficulties in resolving larger, complex banks, we will also need to assess the likelihood of further developments in this area over the medium term, given the very clear determination of the UK government to put in place a resolution mechanism that can also be applied to large, complex banks," says Ms. Rudman.


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.


Moody's has placed the short-term ratings under review for possible downgrade for those institutions for which the downgrade of the long-term rating could potentially also lead to a change in the short-term rating.


RATIONALE FOR NEGATIVE OUTLOOK


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.


METHODOLOGY USED


The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.

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