How Will Bank Credit Rating Downgrades Affect Customers?

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Banks worldwide face up to credit rating downgrades. Image credit: Sanja Gjenero

Moody’s has significantly downgraded the credit ratings of many of our major banks, including the Royal Bank or Scotland group (RBS), HSBC, Barclays, and US firms JP Morgan, Goldman Sachs, Morgan Stanley, Citibank, and the Bank of America, in response to the recent eurozone turmoil.

Santander, the Spanish-based bank with millions of customers throughout Europe, has already been hit with a credit downgrade, earlier this year.

What do these lower ratings mean for consumers, and will this decision further damage our fragile economies?

Who Issues Credit Ratings?

These reports are the result of investigations by Moody’s – one of the three main credit rating agencies, whose market analyses create an impact worldwide.

Their credit ratings system takes into account how likely a firm or business is to repay loaned resources, with grades ranging from AAA (the highest score and a grade the British economy as a whole has traditionally enjoyed, but which is now under threat) to C, which is the lowest rating, meaning that repayment is highly unlikely.

June 2012 saw many of the major banks being downgraded by at least one notch on this system, typically to a low-end A rating or high-end B rating.

Home owners could pay the price of credit downgrades. Image credit: Peter Galbraith

Credit Rating Downgrade: How Will This Affect Borrowers?

The key concern for customers of the affected banks is that as the cost of borrowing rises for the banks, so will the cost for consumers. The obvious way for banks to recoup their increased cost of borrowing is to transfer the expenditure onto customers, in the form of increased interest rates.

Customers could see an increase in the amount paid on tracker mortgages, and loans. The UK has already seen several major mortgage providers raise their rates this summer, and the new, lowered credit ratings could prompt this action to spread throughout providers who have yet to do so.

Concerns for the general economy are also growing as fears of another ‘credit crunch’ rise; with banks at the mercy of higher borrowing rates and reticent to lend to each other, it is possible that we may start to see a re-emergence of the reluctance to issue loans and mortgages to new customers, which has been typical of the last few years of recession and only recently began to abate.

Banking Response to Downgrade in Credit

RBS have been quick to release comments in relation to Moody’s assessment –  their initial response is to deny that there are problems with their credit profile. Moody’s is just one of the three main influencial credit agencies; the other two, Standard & Poor and Fitch Ratings have, say RBS, upgraded their rating by over a notch during the last eighteen months. This leads the bank to conclude that it “disagrees” with Moody’s analysis and predicts the effects of the downgrade will be “manageable.” RBS insists that its credit profile is improving rather than declining, citing decreases of 48% in their loan-to-deposit ratio as an example of such improvements.

Long-Term Results of Credit Rating Downgrade

Whether or not the US and UK economies will take another downturn in light of the downgrades won’t become apparent immediately, but with concerns that the cost of borrowing is set to rise for home-owners and loan-holders, just how “manageable” the effects of Moody’s reports are remains to be seen.

Resources

RBS Group. Response to Moodys rating action. (2012). Accessed June 22, 2012.

Moore, J. Moody’s downgrade for UK banks raises fears of credit crunch (2012). The Independent. Accessed June 22, 2012.

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