DBRS Removes UK Rating Floor

DBRS has today removed the A (high) rating floor that was in place for critically important banking organisations (CIBs) in the UK. This follows DBRS’s July 8 announcement “DBRS Assesses Applicability of Rating Floors for Critically Important Banks in 9 Countries” and reflects DBRS’s view that there is less certainty about the timing and predictability of support for the largest banks in the UK.

DBRS assigned an A (high) rating floor to CIBs in the UK in March 2009. CIBs are those banks whose ability to perform as a long-term counterparty is essential for the robustness of the domestic financial system as a whole. The application of the rating floor reflected DBRS’s expectation that the UK government would provide support, if necessary, to prevent any CIB from weakening below this rating level during a period of heightened stress in the banking system. The floor, which was assigned at the time DBRS put in place floors in a number of other countries, was underpinned by the significant support provided to certain UK banks at the height of the crisis.

Subsequently, the provision of support to the banking sector has become a key political and regulatory concern in the UK. The UK authorities have been very clear that their goal is banks should be allowed to fail, with the risk being borne by shareholders and creditors. However, at the same time the regulators and the Bank of England have also recognised that they are still at an early stage of the complex process of establishing plans to enable the biggest and most complex banks to be wound down without putting financial stability at risk.
Most recently the UK Chancellor has declared the government’s intention to review the possibility of splitting RBS, which is owned 81% by the state, into a “good bank” and “bad bank”, whilst stating that they are not prepared to put more taxpayer capital into RBS as part of this process.

Given the increasing politicisation of the issue of support for the largest banks, DBRS considers there is less certainty about the timing and predictability of any future support for the large banks and this has led to the removal of the rating floor. However, due to the challenges that would face the authorities in the resolution of the largest banks, DBRS is not reviewing the one notch of uplift incorporated into the ratings of the UK institutions it still considers to be systemically important: Barclays Bank, HSBC Holdings, Lloyds Banking Group, Nationwide Building Society, and RBS.

A separate announcement will be made on the ratings of the Royal Bank of Scotland Group, which is the only banking organization in the UK whose ratings are potentially affected by the removal of the rating floor.