We heard yesterday that Fitch has followed Moody’s lead and begun downgrading UK banks’ credit ratings. This reflects the reduced level of support offered by the government. Fitch only actually downgraded Lloyds and RBS – both to A – but Moody’s went further last week, downgrading a total of 12 banks and building societies. These new ratings have not entirely removed the implied tax payer support – only an element of it.

Using Moody’s data, if we remove the implied support provided by the government, the ratings of the big 4 UK banks would look like this:

Within the building society sector, five of the eight firms that were downgraded are now sub-investment grade.

Banks are already finding it hard to finance themselves and any negative noise coming out of rating agencies obviously isn’t going to help lower the yields at which they can borrow. As the cost of issuing senior unsecured debt rises (the lower tier two primary market is effectively shut), the incentive for institutions to issue secured debt and asset-backed securities increases. This would likely put further pressure on senior unsecured bank bonds. Lenders in the senior unsecured part of the capital structure would become more subordinated, with a claim on fewer assets in the event of a workout.

Government support has diminished, rating agencies have predictably reacted negatively, and the banks will continue to face funding pressures. It’s unlikely that we see a light at the end of the tunnel any time soon.