Homeowners faced with hikes in mortgage repayments as credit downgrade threatens UK banks

Millions of homeowners and small businesses could face brutal hikes in their mortgages and loan repayments as three of the biggest high street banks brace themselves for a humiliating downgrade by credit ratings agency Moody’s.
The stark warning from analysts comes as Royal Bank of Scotland admitted yesterday it could be forced to raise at least £12.5billion in collateral to secure funds on the wholesale markets if it is downgraded by just one notch. 
This would come on top of billions of pounds in higher borrowing costs for the state-backed bank as loans on the wholesale markets become more expensive. 
The price of safety: A downgrade by one notch would force RBS to set aside an extra £12.5bn

The price of safety: A downgrade by one notch would force RBS to set aside an extra £12.5bn

RBS, Lloyds and Barclays are all expected to see their credit rating slashed by Moody’s by the end of the month amid growing fears over the economic crisis in the eurozone. Spanish-owned bank Santander was downgraded last month. HSBC and Standard Chartered, which focus on growing emerging markets, will escape censure.
Both Barclays and state-backed Lloyds yesterday refused to reveal the estimated price tag of a downgrade. 
 
But RBS, which is 82 per cent owned by taxpayers, warned in a document published in April that any reductions in its credit rating ‘could adversely affect the group’s access to liquidity and its competitive position, increase its funding costs and have a material adverse impact on the group’s earnings, cash flow and financial condition’. 
Yesterday it confirmed a downgrade by one notch – from A3 to Baa1 – would force it to set aside an extra £12.5billion as security against its loans. Many banks rely heavily on loans from their rivals to lend to customers. 
The higher the cost of wholesale funding, the more they charge on loans to customers. 
Gary Greenwood from Shore Capital said: ‘Banks will do what they always do which is pass on these costs to customers in the form of expensive loans and mortgages.’
Several banks, including RBS and Halifax – owned by Lloyds – have already hiked their standard variable rates on mortgages, affecting millions of customers. 
Yesterday bank sources played down the impact of the downgrade, arguing the move has already been priced into the market in the form of higher borrowing costs on wholesale loans for banks. The European Central Bank’s recent initiative to offer £800million in cheap loans to European banks has made many less reliant on the wholesale markets for funding. 
Banks have also been shoring up their finances by shrinking their balance sheets, bolstering their capital reserves so they are better able to withstand financial shocks. 
RBS has dramatically reduced its reliance on wholesale funding to mitigate the impact of higher borrowing costs.

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