UK Bank Support No Threat to AAA Rating - Fitch

Fitch Ratings views today’s announcement by H.M. Treasury (UK government) of a broad support package as a positive development for the UK banking sector, as it will provide a significant lift to participating banks’ aggregate Tier 1 capital. Fitch also notes that despite the heavy upfront fiscal cost of the measures taken by the UK government today, the UK’s strong credit standing is able to withstand considerable fiscal deterioration without threatening its ‘AAA’ rating.

Fitch believes the availability of a government guarantee on new debt issuance - which Fitch expects to rate ‘AAA’ subject to review of the terms of the guarantees - will provide much needed access to medium-term funding, and the extension and broadening of liquidity facilities by the Bank of England will provide an additional measure of relief.

For those banks and building societies that the government considers are appropriately capitalised (after taking into account higher implied capital targets), a government guarantee of new short- and medium-term debt will be made available on “appropriate commercial terms”. It is expected that new senior unsecured debt of terms up to three years will be covered by this arrangement. Subject to a satisfactory assessment of the guarantee arrangements and conditions applicable, Fitch would expect to rate qualifying debt at ‘AAA’ (the UK sovereign rating). Current government estimates for the take-up of the guarantee will be around GBP250bn.

Fitch views this development as particularly positive since the rapidly diminishing availability of longer-term funding has proved to be one of the catalysts for the credit crunch and reduced availability of financing for home buyers.

Today’s announcement that the Bank of England will continue to provide liquidity to the UK banking system, extending and broadening its short-term facilities and increasing the availability of collateralised funding through the Special Liquidity Scheme to at least GBP200bn is expected to provide some relief from these pressures.

Fitch estimates the gross fiscal cost of measures by the UK government to date in response to the financial crisis is GBP100bn (USD175bn), equivalent to 7% of GDP, a similar magnitude relative to national income as the USD1trn (GBP570bn) of measures announced by the US government over recent weeks and months

The net fiscal cost to the UK government will be substantially less, however, as it is acquiring assets, albeit of an uncertain value, which will generate income that will at least partially offset the gross cost.

The UK’s credit standing remains of the highest standard. There is sufficient headroom within the tolerance of the UK ‘AAA’ rating to absorb a sizeable near- term fiscal deterioration arising from measures to stabilise the financial system and prevent an excessively deep and prolonged recession.