Confidence in the UK's financial sector was dealt a blow today after an agency slashed the credit ratings of some of Britain's biggest financial institutions to reflect reduced Government support.

Lloyds Banking Group, Santander and Co-op Bank had their ratings downgraded one notch, RBS and Nationwide Building Society by two-notches, while seven building societies saw ratings cut by between one and five places.

Key Points

  • Moody's slashes credit rating of 12 banks and building societies
  • Triggers fall in banking shares on the London Stock Exchange
  • Reflects reduced Government support

Moody's stresses its review does not reflect a deterioration in the financial strength of the banking system or the Government but will nevertheless reduce confidence in those institutions.

The widely-expected move by Moody's, which triggered a fall in banking shares on the London Stock Exchange, reflects moves by the Government to shift risk away from taxpayers and onto creditors. it could lead to the cost of borrowing for the affected financial institutions to rise.

The Chancellor says he is sure the banks are well funded, while government-backed Lloyds and RBS defended their record on improving their finances.

Government reduces support

Elisabeth Rudman, senior vice president of the financial institutions group at Moody's, says: "Moody's has lowered the amount of support it incorporates into the institutions' ratings to reflect the overall weakening support environment."

Moody's says the downgrade came after government support was removed for the seven small institutions, while help was reduced for larger "more systemically important" institutions including RBS.

While the Government is "likely to continue to provide some level of support" to bigger banks, Moody's says it is "more likely now to allow smaller institutions to fail" if they hit troubled waters.

Chancellor George Osborne says the move reflects the British Government's shift away from guaranteeing all the UK's largest banks.

He adds: "I'm confident that British banks are well capitalised, they are liquid, they are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment."