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Q&A: How Banking Downgrades Affect UK

(c) Sky News 2012

Some of Britain's biggest banks have had their credit-ratings cut, which could make mortgages more expensive.

The downgrades have been anticipated for some time and as such the markets have had time to factor them in.

The FTSE 100 closed just under 1% down and most of Europe (Chicago Options: ^REURUSD - news) 's major stock markets suffered only small losses on Friday.

There was no significant reaction to the announcement from Moody's and in fact, the FTSE's top five fallers contained no UK banks on either Thursday or Friday.

In short, probably not at all.

After the last banking crisis, the London-based Financial Services Authority (FSA) introduced various safeguards to protect savers in the event of a banking collapse.

This included the guarantee that up to £85,000 of savings will protected should a bank regulated by the FSA (that includes all the major ones) find itself in trouble.

To be clear, we are nowhere near that scenario as things stand right now.

But a downgrade might affect a bank's long-term funding costs. Put simply, banks need to borrow money on the international markets to keep their finances ticking over.

The lower a bank's credit rating, the harder it is for them to borrow money at reasonable rates.

They will also need to put up more money as collateral when borrowing. If this extra cost ends up being significant then it is possible that said bank will transfer the extra costs onto the customer.

That might come in the form of higher interest rates or a policy of reduced lending.

This would have a knock-on effect to mortgages and businesses trying to borrow money.

However, there is not anything to suggest this will be a major or highly noticeable consequence of the downgrade for the foreseeable future.

Think of this downgrade as the 'creep-factor' from the eurozone crisis. Of course it is possible that as the problems in the single currency continue, ratings agencies might find it necessary to downgrade some banks further.

It is also likely that the other two ratings agencies follow Moody's lead in the coming weeks.

The further a bank is downgraded the greater the effect will be on the average person and the wider economy.

It is generally felt that UK banks have more than enough money to deal with this round of downgrades but should any bank be subject to further cuts then that question will need to be asked again.