UK banking risks are still heavily skewed towards the downside as gov't may actually make them absorb some credit losses

Via Moody's:
"The credit environment remains challenging for UK banks due to an unusually broad range of likely outcomes, which are skewed towards the downside," says Elisabeth Rudman, a Moody's Vice President -- Senior Credit Officer and author of the report. The level of non-performing loans is likely to remain elevated in the coming quarters as consumer indebtedness remains considerably high, and Moody's expects that loan growth will remain subdued. Moreover, the full impact of the fiscal austerity package on the economy and unemployment is unlikely to materialise by the second half of 2011. In addition, although Moody's expects the current problems in Ireland and other peripheral European economies to have a direct impact on profitability only, rather than capital levels, these issues are exacerbating the tough environment for UK banks.

The substantial amount of bank debt (approximately GBP215 billion of rated term debt) that will mature in 2011 and 2012 represents the second major challenge that informs Moody's negative outlook on UK banks. "While Moody's acknowledges that banks have plans to improve their funding profiles, their ability to execute these plans will depend on continued access to international debt markets," explains Ms. Rudman.

The third key challenge facing UK banks is the likelihood of declining systemic support. Following the substantial support provided by the UK government to its banking system during the financial crisis, Moody's notes that the UK Tripartite authorities have been vocal in their resolve to ensure that tax payers are not required to support banks in any future crises. As well as allowing junior debt holders to absorb losses in certain cases over the past two years, they have made clear their intention to introduce further mechanisms that can be used for the resolution of large, complex banks. "In response to this declining systemic support, Moody's expects to adjust the level of support that is incorporated in its senior debt ratings for banks over the next one to two years," says Ms. Rudman. "The level of downward pressure on senior debt ratings will, in many cases, hinge on the speed of the recovery of banks' stand-alone financial strength relative to the speed of the authorities in implementing these mechanisms."

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