No more moody blues for UK banking industry

Moody’s, the credit ratings firm, has released its findings on the position UK financial sector for the future.

Fortunately, things seem to have taken a turn for the better, as Moody’s has judged the situation as “stable”, rather than the “negative” rating it gave previously.

The change, the firm said, was due to the balancing of the economic situation in the UK, even though growth has been slow.

In a statement, the company said: “Unemployment has not increased as much as in previous recessions, thereby contributing to a stabilisation in banks’ asset quality.”

Profits are currently still low, and given the world economic climate growth seems unlikely. However, Moody’s seems to have faith that the UK banking industry will recover.

New rulings over the financial industry also seem to have had a positive impact, with the stricter regulations improving the banking system.

The statement from the company elaborated, commenting with the following: “Overall, we believe that UK banks are sufficiently well capitalised to absorb expected losses from both our central and adverse stress scenarios.”

Moody’s is of the opinion that once the new stipulations of the Prudential Regulation Authority are followed, the more extensive UK banks will have created the reserve capital to be used as a failsafe for capital deficits. This will put the industry in a secure position to face any risky situations in future, and will put the UK financial institutions ahead of the European counterparts.

The new regulations put in place by the Prudential Regulation Authority forces lending agencies to create a buffer sum of approximately £27.1 billion to safeguard against losses through risk. The Royal Bank of Scotland was the worst culprit, and therefore has been asked to produce £13.6 billion of this buffer sum.

Though Moody’s outlook for the future is positive, low interest rates could negatively affect the profits of the banks. Overall, however, the company does foresee an improvement in profits.

Another factor to consider is the price of introducing new regulations, which could lead to one time charges. The implementation of the regulations could have a variety of effects, but for long-term prospects the Prudential Regulation Authority’s ruling should reduce risk.

Additionally, the debt and deposit ratings of the UK banking system was seen as negative by Moody’s, due to the decision by the government to try not to use taxpayer money to bail out struggling banks.

The European Union will also be suggesting new regulations that will force creditors to pay rather than the general public, should a bank encounter difficulties.

To read more on this subject, please see my Slide Share.

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2 comments
  1. Jay said:

    Great article, very precise. I have seen a little bit about this issue online and an improvement in the situation does seem to be the general consensus! Carry on blogging!

  2. Sam said:

    Well said!

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