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Moody’s downgrades a dozen U.K. banks‘

LONDON (AP) -- Moody’s Investors Service has downgraded the debt ratings of a dozen British banks because of doubts over the strength of the government’s support.

Moody’s said Friday that the downgrades include a two-notch downgrade to “A2” for government-controlled Royal Bank of Scotland, and a one-notch cut to “A1” for Lloyds TSB Bank, a unit of part-nationalized Lloyds Banking Group.

Spanish bank Santander 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 PLC and HSBC PLC.

Shares in Lloyds and Royal Bank fell in early trading Friday, underperforming the wider FTSE 100 index, which was modestly higher.

While the agency believes that the British government will continue to provide some support to systemically important financial institutions, 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.

Meanwhile, the Financial Times reported Friday that government officials are worried that RBS, 83 percent owned by taxpayers, may need additional support depending on the outcome of a review of the industry by the European Banking Authority.

In the stress tests if 91 European banks in July, RBS was among those institutions in the so-called gray area with a "stressed" capital ratio of 6.3 percent.

In its half-year report, RBS said it had cut its exposure to Greek sovereign debt by 50 percent.
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