UK Treasury support for ring-fencing proposals is credit negative for banks, says Moody’s

Moody's Investors Service said that the UK Chancellor's expression of support on Wednesday for the ring-fencing proposals contained in the interim report of the Independent Commission on Banking published in April increased the probability of a negative outcome for bondholders of the affected banks.
The final recommendations of the ICB will be published in September and the government will then formally respond to the recommendations. However, in his Mansion House speech, the Chancellor expressed the UK government's support for the key proposal of ring-fencing of retail banking activities. By distancing banking activities which are outside the ring-fenced entity from those which the UK authorities are likely to deem systemically important, this measure is intended to broaden the authorities' options for resolving the non systemic entities. It will therefore have negative implications for the bondholders of these non-systemic entities, as they will be less likely to benefit from government support.
"As we indicated at the time of the publication of the ICB interim report in April, we need greater clarity on which assets will be allocated to the ring-fenced operations and on the allocation of existing debt between entities, as well as detail on the capital and funding profile of each institution, before we can assess the full impact on bond holders", said Vice President Elisabeth Rudman. "We consider ring-fencing to be negative for existing bondholders if, as we expect, they are largely placed outside the ring-fenced entity".
The ring-fencing proposals would likely lead to a further reduction in our assumptions of systemic support included in the senior debt ratings of these banks. The Aa3 senior debt and deposit ratings of RBS were placed under review for possible downgrade in May to reassess the current high level of systemic support incorporated in the ratings. At the same time the outlook on Barclays' Aa3 rating was changed from stable to negative and the negative outlook on HSBC Bank's Aa2 rating was affirmed, to reflect the publicly stated intention of UK regulators to improve their resolution powers for large, systemic institutions by allowing for burden-sharing with senior debt holders. We will monitor to what extent the final ring-fencing proposals increase the likelihood of burden-sharing with senior debt holders.
The proposal to ring-fence retail activities would have the greatest negative impact on creditors of Barclays Bank, RBS and HSBC as they have UK retail banking and wholesale banking activities within the same legal entity.