Britain’s Banks Downgraded By Standard & Poor’s

(Telegraph) – BRITAIN’S BANKS are no longer regarded as among the most secure in the world as the Government has failed to introduce proper safeguards in the wake of the global credit crisis.

One of the world’s biggest credit ratings agencies said that Britain’s ongoing “weak economic environment” and Gordon Brown’s failure to properly reform the financial system had led to its unprecedented decision to “downgrade” Britain’s banks.

The warning from Standard & Poor’s sparked an immediate slump in the stock market and the value of the pound last night.

The international creditworthiness of the country’s banking system is now on a level which is equivalent to poorer countries such as Chile and Portugal.

It could now cost banks more to borrow money on the wholesale financial markets – with consumers facing higher prices for mortgages and loans as a result.

The downgrade underlines the growing concerns over Britain’s financial state among international investors and is a major embarrassment for the Prime Minister just days after Britain only managed to limp out of recession.

Earlier this week, official figures showed that the economy grew by just 0.1 per cent during the final three months of 2009 – compared to expected growth of 0.4 per cent or more.

The downgrading of Britain’s banks could be followed by the entire country’s credit-rating being reduced. The credit-rating determines the cost of borrowing on international financial markets.

A downgrade would mean the Government has to pay more to borrow money which could have a major impact on the country’s finances.

In a statement released yesterday, Standard & Poor’s said: “We no longer classify the United Kingdom among the most stable and low-risk banking systems globally.

“This is due to our view of the country’s weak economic environment, the reputational damage we believe has been experienced by the banking industry, and what we see as the high dependence on state-support programs of a significant proportion of the industry.”

The ratings agency also warns that the high debts of the British government and consumers are likely to lead to banks accumulating losses.

Standard & Poor’s also implicitly criticises the Prime Minister’s response to the banking crisis. “In our view, enhanced regulatory oversight and reform of the framework for financial stability remains incomplete,” it said.

Britain’s banks were previously comparable with those in countries such as France and Germany. However, they are now considered less secure than Italy and Belgium. Over the past few centuries, the British banking system has been regarded as one of the best, and most secure, in the world.

Standard & Poor’s also warned that the banks may face a further downgrade if Britain “fails to strengthen” by tackling “persistent budget deficits”.

There is increasing criticism among financial experts at the Government’s failure to announce detailed plans for public-spending cuts to reduce record levels of public-sector borrowing.

Last night, Mark Hoban, the shadow financial secretary, said that the Government needed to take urgent action. “This is disappointing news and demonstrates the need for reforms to the banking sector so that we don’t repeat the mistakes of the last decade. Our reforms should help restore the reputation of the UK banking sector.”

The Prime Minister’s spokesman refused to comment on the Standard & Poor’s report. However, he said: “The Prime Minister and Chancellor have both made it clear that it is encouraging that the UK economy is coming out of recession.

“Every country has to have a regulatory framework that is appropriate for its banking system.”

Global business leaders are currently meeting in the Swiss resort of Davos where banking reform is high on the agenda. Mr Brown and Alistair Darling, the chancellor, have criticised radical plans unveiled by Barack Obama to break-up American banks.

President Obama has proposed that banks are no longer able to trade on the financial markets using their own funds following criticism of their behaviour in the run-up to the global credit crisis. This would make banks more secure.

However, the proposal is being vigorously opposed by banks – who are about to unveil huge profits, and bonuses for many staff, over the past year.

Yesterday, the heads of 30 banks including Barclays and HSBC held a private meeting in Davos to discuss how to rebuff the growing calls for new regulation.

Mr Darling, the Chancellor, travelled to the Swiss resort last night to warn banks that they must change their behaviour and culture.

The British Government has provided more than £1 trillion in support to the banking industry and taxpayers now own majority stakes in RBS and Lloyds Banking Group.

Last night, the FTSE-100 index of the country’s biggest companies fell by 1.4 per cent to close at 5,145. The stock market has now fallen by almost five per cent this month.

Sterling also fell against the dollar and yen.

“Sterling has come off aggressively in the wake of the Standard & Poor’s statement,” said Steve Barrow, head of Group-of-10 currency strategy at Standard Bank.

“The pound is vulnerable, especially against the dollar and the yen.”