The ratings agencies have not exactly covered themselves in glory during the financial crisis, yet their views still count. And tonight the latest moves from Moody's put pressure on 15 of the world's biggest banks, including some of our own.
The risk? Imagine this - you have a large secure deposit for a house, the bank is likely to give you a good deal on your mortgage. If you have a much lower deposit, you have to pay a far higher price to borrow. In the same way, for the banks, a lower credit rating means they have to pay more to borrow, which is how they get their cash, just like most of us. And the risk is that will be passed on to consumers, in higher mortgage prices and bank fees.
The banks were expecting this, and to an extent this downgrade has already been priced into the costs for them to do business. Also Moody's has changed the methodology of how they make their calculations.
It may be that the impact is far smaller than the gravity of the headline. One senior banker told me tonight that they have already stress tested the downgrade and it should not have a massive impact. But as he told me, the effect was uncertain: "We think it might be a damp squib, but it could be very dangerous," he said.
One City trader told me the Bank of England and Treasury's announcement last week to make up to £100 billion of cheap loans available for the banks to borrow could absorb some of this risk, acting like as a buffer. Yet I'm told the main plan to make that cash available, known as Funding For Lending, is a very long way from being up and running. Even though the smaller scheme did get under way this week.
Richard Lloyd, from the consumer group Which, told us tonight: "There is a fear that banks will use this as an excuse to keeping put costs up. They've already been hiking mortgage costs up in recent months...This is going to go on and on, and will dent consumer confidence because of the exposure of banks to Europe."
Among the banks to have been downgraded:
- Bank of America
- Credit Suisse
- Goldman Sachs
- JP Morgan
- Morgan Stanley
- BNP Paribas
- Credit Agricole
- Deutsche Bank
- Societe Generale
- Royal Bank of Canada