A number of UK banks have seen their credit ratings cut overnight, sparking fears that borrowers, especially businesses, could find it harder to get finance and be forced to pay higher interest rates.

Moody’s, the credit rating agency, has downgraded a total of 15 worldwide banks and financial institutions including Royal Bank of Scotland, Barclays, and HSBC.

Barclays suffered the biggest cut in the UK, by two ‘notches’, from Aa3 to A2; HSBC and RBS were cut by one ‘notch’.

The downgrades appear to be a result of the crisis in the Eurozone and concern that governments could withdraw support for banks in the future, allowing them to fail, rather than propping up financial institutions as they have done in some cases over the past few years.

Announcing the downgrades Greg Bauer, Global Banking Manager at Moody’s, said: “All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities.”

Responding RBS said: “The group disagrees with Moody’s ratings change which the group feels is backward-looking and does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile.”

Higher interest rates for borrowers?

Although the banks involved tried to play down the effect of the ratings cut, some financial experts are concerned that the changes will make it more expensive for HSBC, RBS, and Barclays to borrow money, which in turn could lead to higher interest rates on mortgages, personal loans and business loans.

Furthermore the CBI warned this week that the economic recovery was in danger of being “choked off by a lack of finance” and yesterday’s downgrades for three major UK banks will do nothing for their ability to raise funds to lend on to UK businesses.

Responding to the news Andrew Tyrie, Chairman of the Treasury select committee, said: “Any increase in the cost of funding would add to the squeeze on banks. The UK needs the banks to recover, we can’t have a full economic recovery without them.”

He continued: “This is particularly important to hundreds of thousands of small businesses and sole traders who have difficulty getting access to loans at reasonable rates.”

Help for banks

Last week the Treasury and the Bank of England announced their intention to offer banks access to billions of pounds of credit at low rates, providing it was then lent on to businesses.

Experts hope that the measures announced last week, will be sufficient to mean that the banks affected by Moody’s downgrades, will still be able to support businesses with the credit they need to survive the economic downturn and even expand.