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Moody's Downgrades Ratings of British Banks

LONDON -- A dozen British banks saw their credit ratings downgraded Friday over doubts over the strength of the government's support, in another sign that the banking sector is facing renewed stresses.

Moody's Investors Service insisted that its downgrades have nothing to do with any worsening in the financial strength of the sector or over the state of the government's public finances as economic growth stalls. A near standstill in growth prompted the Bank of England Thursday to launch a 75 billion pounds monetary stimulus.

Among the downgrades, Moody's reduced its rating on government-controlled Royal Bank of Scotland (RBS) by two notches to A2. It also cut its rating on Lloyds TSB Bank, a unit of part-nationalized Lloyds Banking Group (LYG) by one notch to A1.

Spain's Banco Santander (STD) had its British business downgraded by one notch to A1, while Nationwide Building Society suffered a two-notch reduction to A2. However, there were no changes in the ratings of Barclays (BCS) PLC and HSBC (HBC).

Shares in Lloyds and Royal Bank fell in early trading London Friday, underperforming the wider FTSE 100 index. Lloyds was down 3%, while Royal Bank fell 4%.

While the agency believes that the British government will continue to provide some support to systemically important financial institutions, it said it is more likely to allow smaller institutions to fail.

"The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government," Moody's said.

RBS said it was disappointed that "Moody's have not acknowledged the progress we have made in strengthening the bank's credit profile."

"We do, however, see the removal of implicit government support for the U.K. banking sector as being a necessary and important step forward as the sector returns to standalone strength," it added.

Treasury chief George Osborne said the downgrades reflected the government's determination to move away from guaranteeing all the big banks.

"People ask me, how are you going to avoid Britain and the British taxpayer bailing out banks in the future? This government is taking steps to do that," he said in a BBC radio interview. "Therefore credit rating agencies and others will say, well actually these banks have got to show they can pay their way in the world."

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