Banks face higher funding cost after credit ratings reduced

Standard & Poor’s has cut its ratings on 15 big global banks.

Royal Bank of Scotland and Lloyds were the only European banks to have their short-term credit ratings cut – a reduction to A2 from A1.

Analysts said that when this happens, it can be a step change that increases funding costs.

Lloyds said it did not expect the rating action to have a material impact on its funding position, as the bank funds itself through subsidiaries that are unaffected.

Long-term rating changes included one notch downgrades on Barclays, HSBC, Bank of America, Citigroup, Goldman Sachs and UBS.

Analysts at Mediobanca said in a note: “The downgrades confirm ongoing concerns on how fast banks can be impacted by the current challenging environment.”

While the downgrades were driven by a revision of the agency’s internal models and not because of a change in the banks, they will have a real impact on funding costs for the sector, already on edge because of Europe’s debt crisis.

Andrew Fraser, investment director at Standard Life, said: “It will likely raise concerns about their short-term funding because they will be sidelined by money-market funds who are the traditional buyers of that short-term paper.

“The timing of the statement is perhaps more significant than its content because it comes at a time when liquidity is under pressure at banks.”

European Union talks to save the single currency limped ahead this week, with a key functionary saying the region was entering a “critical period” of 10 days to come up with plans to stave off the crisis.

Ahead of Standard & Poor’s downgrades, rival Moody’s said it could downgrade the subordinated debt of 87 European banks. Moody’s is concerned that Governments are too cash-strapped to bail out holders of riskier bank debt.

Standard & Poor’s move could force banks to put up more scarce collateral.