The agency reduced its outlook from stable to negative, reports the Guardian, because of the uncertainty faced by lenders to banks as a result of new rules on ringfencing high street arms from "casino" investment banking businesses.
Introduced as a result of the Vickers report on banking, the ringfences need to be in place by 2019, although banks have expressed concern at the cost they will incur to implement.
Moody's said:
"We expect the related changes in business models, organisation and funding structure changes to have significant implementation costs over a multi-year period, which, given their early stage of development, have yet to be reflected in banks' bottom lines."
"As a result of their final implementation, our current systemic support assumptions for UK banks will likely decline [during the next 12 to 18 months]."
Its list of positive factors for the sector – stronger economic growth, improving profitability and fewer bad debts – is offset by the fact that UK banks are exposed to charges which could hit profits and erode capital bases. According to the rating agency, the six largest banks have incurred £20bn of costs for PPI mis-selling, £4bn for interest rate swaps and £6.5bn for fines such as those for LIBOR rigging and money laundering offences.
"Banks will have to set aside additional provisions for PPI, but we believe these costs have peaked. However the large UK banks still face potential material redress costs of the sale of interest-rate hedging products, upcoming settlements and fines from US and other cross-border investigations."
