Moody's cuts credit ratings of 12 British banks

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Moody's on Friday downgraded its ratings for a dozen British banks, including state-owned Royal Bank of Scotland and Lloyds TSB, due to the removal of government financial support.

Moody's said it chose to downgrade five large banks and seven small lenders as government action had "significantly reduced the predictability of support over the medium to long-term."

The downgrades did not concern HSBC, Barclays or Standard Chartered banks, the agency said. But it added that it believed Britain's government was in the current climate more likely to allow small lenders to fail if necessary.

The announcement comes as the European Union seeks swift recapitalisation of the region's banks to avert the spreading across borders of the eurozone debt crisis.

Friday's downgrades could result in banks facing higher rates of interest when looking to borrow money on markets, further hindering their attempts to return to better health.

Moody's said it had downgraded Royal Bank of Scotland and Nationwide Building Society each by two notches to A2 from Aa3; Lloyds TSB Bank and Santander UK were cut by one grade to A1 from Aa3; the Co-Operative Bank was downgraded one level to A3 from A2.

"Moody's Investors Service has today downgraded the senior debt and deposit ratings of 12 UK financial institutions and confirmed the ratings of one institution," the agency said in a statement.

"The downgrades have been caused by Moody's reassessment of the support environment in the UK which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support... for five larger, more systemically important financial institutions."

Moody's said it "believes that the government is likely to continue to provide some level of support to systemically important financial institutions. However, it is more likely now to allow smaller institutions to fail if they become financially troubled."

Moody's stressed that the downgrades "do not reflect a deterioration in the financial strength of the banking system or that of the government."