Thank you Moody's: With downgrade of UK banks, banks warned not to rely on bailouts

According to a Telegraph article, banks have been warned that they will have to prove that they can pay their way in the future because they cannot count on a bailout.  This warning took the form of a downgrade from Moody's that was partially based on the idea that future bailouts might not be available.

How can banks prove they can pay their own way and not be reliant on future government bailouts?

Regular readers know the answer for banks is by disclosing their current asset and liability-level data.  With this on-going disclosure, market participants can assess the risk of the banks.  With these assessment comes the ability to impose market discipline on those banks with too much risk or that refuse to provide the same level of disclosure (not providing disclosure is equivalent to saying the bank has something to hide).

After 12 British banks had their credit ratings cut by Moodys, the Chancellor said yesterday: "As I understand it, one of the reasons they are doing this is because they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain. 

"In other words, how we are going to avoid Britain and the British taxpayer bailing out banks in the future, this Government is taking steps to do that and therefore credit rating agencies and others will say actually these banks have got to show that they can pay their way in the world." 

Treasury officials stressed that banks were currently well-resourced and the future plans would not put savers' money in jeopardy. The Chancellor pledged to use "all the tools available" to tackle the current economic crisis.

Mr Osborne said that Britain had been at the "epicentre" of the initial banking crisis in 2008 but insisted that action taken by the Coalition "has moved Britain out of the eye of the storm".