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S&P: UK will prop up banks for 2 years

Friday 27 January 2012 - by Karina Whalley

 Standard & Poor's believes the UK will continue to offer extraordinary government support to prop up struggling banks for the next two years at least, due to fears of wider systemic contagion.

However, the structural changes that will be hitting the UK banking system in the medium-to-long term will have a bearing on bank debt ratings, the credit rating agency said, in a report released on Friday.

"The UK government cannot yet walk away from systemically important banks without running the risk of wider systemic contagion," warned S&P.

"We therefore continue to factor notches for the likelihood of extraordinary government support in a crisis into our ratings on systemically important UK banks and as a general rule, their overseas subsidiaries," said the agency, adding that it expects the support to continue over a minimum two-year horizon.

S&P acknowledges that UK legislative initiatives currently under consideration could change the situation.

The UK is expecting a raft of new banking regulation including the Independent Commission on Banking's ring-fencing proposals, which S&P believes will make future government intervention less likely.


In the agency's Banking Industry Country Risk Assessment on the UK, published alongside the report on Friday, S&P ranks the UK in BICRA group three, with group one being the lowest-risk banking systems and group ten the highest-risk.

Other countries that share the UK's ranking of three include Chile, Denmark, Korea, New Zealand and the US.

The BICRA score is made up of economic and industry risk assessments. In terms of the former, the agency says the UK faces a very low risk to its economic resilience, reflecting the country's underlying ability to absorb adverse economic developments. But economic imbalances and credit risk in the economy are problematic areas for the UK, according to S&P.

On a system-wide level, S&P said the UK's banking system ranking could improve if the regulatory regime is boosted, system-wide risk appetite decreases or macroprudential regulation helps to reduce economic volatility.


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