Major high street banks face having their credit ratings scaled back

Royal Bank of Scotland, Lloyds Banking Group and Barclays were among 17 worldwide believed to be in line for a downgrade by agency Moody’s over fears the eurozone crisis threatens their stability.

The move would ramp up their funding costs, which in turn could be passed on to the consumer in the form of higher mortgage rates and charges. The cuts are part of a wider review by Moody’s of the global banking sector that began in February, and saw it downgrade 11 European banks earlier this month.

Speculation on who might be next in line came as independent auditors revealed Spain’s troubled banks could need as much as 62bn euro (£50bn) in new capital.

Deputy Bank of Spain governor Fernando Restoy noted this worst-case scenario was far below the 100bn euro (£80bn) the 17 eurozone countries have made available to rescue Spain’s banking sector, which is struggling under toxic loans and assets.

Spain is to use the figures from the two outside auditors to decide how much to ask for.

Moody’s latest downgrades, which are expected to range in scope from one notch to three notches, will follow joint efforts by the Bank of England and Treasury to boost cash flows in Britain’s banks through a multi-billion pound cheap loan scheme.

The banking industry has been hit by higher funding costs as the eurozone troubles escalated and has been hoarding money for fear of another worrying phase in the crisis.

The Bank held its first auction under the scheme on Wednesday, offering £5bn in cheap loans with a rate of 0.75 per cent, which was entirely taken up by the country’s lenders.

Moody’s, which warned in February that rating cuts were on the cards for Britain’s banks, is likely to take a more pessimistic view on the creditworthiness of lenders.

A cut last month to the credit rating of Santander UK, the British arm of the Spanish lender, prompted fears for the safety of customers’ deposits although this was denied by the bank,

Moody’s also qualified its decision to move the UK business to an A2 rating, saying that was appropriate given its “general funding independence”, and that it had “no direct exposure to the Spanish government (or regional governments)”.

It prompted a statement from the Treasury, the Bank of England and the FSA to reassure customers, saying deposits up to £85,000 were protected.