Why we should cheer Moody’s downgrading British banks

By the looks of it, in the next few days Moody’s will be downgrading its credit ratings for various British banks. Bad news, right?

Well no.

Good news really.

Good news as British banks should be rated as less than completely safe. That is because a major point of the changes to British banking regulation is to remove the ‘too big to fail’ hostage situation the banks put taxpayers in and instead replace it with ‘you speculate, you lose, you go bust’.

Recognising that British banks are not a surefire safe thing is therefore good news as it shows a better connection between reality and ratings than has sometimes been apparent.

Good news too because although the Moody’s ratings will be dressed up as bad news that will have an impact, the reality is that, despite their occasional best efforts to demonstrate otherwise, financial marketsĀ are not simply in hock to the latest faddish headline. Rating agencies may increasingly attract the headlines when they pontificate. But given their highly spotty records at actually rating risk in the last few years, the markets in fact often pay very little attention to what the ratings agencies are saying, instead relying on wider and more sensible judgements.

In other words, the change from Moody’s will not damage the banks in the financial markets but will be a welcome recognition that banks are not guaranteed taxpayer funds to pick up their mess no matter how big it is.

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