The chairman of the Independent Banking Commission (ICB) insisted that rather than being seen as a warning against his proposals, the downgrades should be seen as \”a natural reflection of the taxpayer getting one step further off the hook\”.
Last week Moody\’s cut the ratings of 12 British lenders, including Royal Bank of Scotland and Lloyds Banking Group, saying that the ICB\’s report was \”credit-negative for bond holders\”.
Quite. The downgrade was entirely as a result of changes in the government guarantee on offer to the banks.
Yes, this does make things more dangerous for bondholders: it also reduces moral hazard and the implicit subsidy provided by taxpayers to bank shareholders.
This is of course exactly what several people have been arguing for. Strange that those arguing for these things immediately stated that the downgrade was Armageddon really.