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Moody’s says the Independent Commission on Banking’s proposals for ring-fencing retail activities of UK banks would have the most negative potential credit rating impact on Barclays, RBS and HSBC.

Moody’s Investors Service said today that the proposals contained in the interim report of the UK Independent Commission on Banking would likely have a mixed credit impact on the UK banking system.

“Three key proposals may have the most significant credit implications for UK banks,” says Vice President Elisabeth Rudman. “These provisions deal with protecting retail depositors, strengthening the capital that supports retail banking activities, and increasing competition.” Rudman continues, “While it is still too early to generalise, at this point we see both positive and negative implications for creditors of UK banks.”

The ability to resolve and unwind systematically important banks is an overarching theme of the report, and this issue continues to be a key driver in Moody’s assessment of risks leading to negative pressure on banks’ senior debt ratings. (Please see “Moody’s to reassess systemic support for UK financial institutions,” April 7, 2011).

The proposals could affect individual banks as follows:

The retail and investment banking activities of Barclays Bank (NYSE:BCS) (Aa3 stable; C/A3 stable), RBS (Aa3 stable; C-/Baa2 stable) and HSBC Bank (HBC) (Aa2 negative; C+/A2 negative) fall broadly within the same legal entity. The proposal to ring-fence retail activities would therefore have the greatest negative impact on creditors to these banks.

Lloyds TSB Bank (NYSE:LYG): (Aa3/C-/stable): While wholesale/investment banking activities are a small proportion of the bank’s activities, a proposed requirement to divest more branches could be negative for the bank.

Source: Moody's Says Barclays, RBS, HSBC Could See Most Negative Impact of U.K. Banking Commission Proposals