Moody’s downgrade of Santander might raise questions as to whether the move could affect PPI complaints against the bank. However, because Santander in the UK is independent of its Spanish parent, customers with PPI claims do not need to worry.

While Santander is originally a Spanish company, the UK subsidiary is autonomous and not joined to the parent bank. About 90 per cent of Santander UK’s assets are in United Kingdom and the bank is regulated by the Financial Services Authority.

Moody’s downgrades 16 Spanish banks

Ratings agency Moody’s lowered the credit ratings of 16 banks in Spain as Madrid appears less able to support these troubled institutions. Additionally, the agency downgraded four Spanish regions. The downgrade comes after rumours of a run on Bankia, Greece’s fourth largest bank. Athens denied that there was any run on the bank, but that has not calmed investor fears and many think that Spain may follow Greece if that country leaves the Eurozone. Stocks in Bankia plummeted by 30 per cent on the reports with a disaster averted only when the government bought up 45 per cent of the company. Last week, the European Commission said that debt loads in Spain could hamper the country’s efforts to achieve its goal of public spending at 5.3 per cent of GDP this year.

Santander cut

Moody’s lowered Banco Santander’s credit rating to A3 from the previous Aa3 rating. Santander now has the same rating as the Spanish government. The ratings agency is particularly worried over the rise in troubled loans in the Spanish banking system. Bad loans rose sharply in March accounting for 8.37 percent of all lending, the highest level since 1994. Santander rose to prominence in UK banking by purchasing former banks Abbey National, Alliance & Leicester and Bradford & Bingley. The bank recently acquired the Royal Bank of Scotland’s branches in England. Santander UK also saw a Moody downgrade to A2, which is still a notch above its Spanish parent. As Santander is such a major player in UK banking, the downgrade illustrated the country’s vulnerability to the turmoil going on in the Eurozone. However, the Financial Services Authority has assured British depositors that their money is safe. The UK government guarantees all deposits in FSA regulated banks.

Santander UK funds secure

While the Spanish parent company could request capital from its UK subsidiary, the Financial Services Authority would monitor such transactions. The FSA would not allow transfers that would greatly weaken Santander UK. At most, we might expect any money sent back to Spain to have an impact on Santander UK’s cash flow. However, the FSA will ensure that the bank remains stable and able to meet its PPI obligations. The company moved to calm customer fears, as there were signs that UK customers might be a panic mood. Executive Director Steve Pateman said that the bank was still safer than competitor Barclay’s.

“Firewall” against problems

According to a Santander UK spokesperson, the banking group maintains a “firewall” that shields sections of the group from problems plaguing other sections. The autonomous nature of the subsidiary prevents the parent from taking actions that would hurt UK depositors. In addition, the Santander spokesperson said that the company also maintains a “firewall” in its borrowing and lending practices so that all UK-raised money remains in the UK. Worries over the bank spiked after the Kent County Council stated that it was no longer making overnight deposits in Santander. The council said it was worried over Madrid’s moves to place bad loans in holding companies and to require financial institutions to set aside an additional €30bn (£24bn) to safeguard their healthy mortgages.

Councils wary after Iceland meltdown

The reason for the Kent County Council decision may stem from the experience of councils after the 2008 collapse of savings banks in Iceland. Many councils had placed millions in these banks due to their highly attractive rates. When the banks collapsed, the deposits were in limbo until the British and Icelandic governments negotiated an agreement. Many councils did not receive full repayment until three years later. However, the situation for consumers is different from that of the councils, as they enjoy protection from the Financial Service Compensation Scheme, which covers the first £85,000 in savings deposits in each protected bank. Despite the move by the Kent County Council, Santander UK is still on the council’s list of approved banks for services other than overnight deposits.

FSA must approve fund transfers

Although Santander UK is part of the international Santander banking group, it still must abide by UK regulations. The Financial Services Authority must approve any money sent from the UK subsidiary to the parent company in Spain. These funds may only come from a share dividend that complies with FSA’s capital adequacy regulations. Banco Santander has a number of options that it can take to raise much-needed capital. For example, it could sell some of its international assets that constitute about 90 per cent of its entire operations.

Pateman reassures investors in Birmingham

Speaking before Birmingham business leaders, Pateman said that UK customers have nothing to worry about even if there is a run on Spanish banks. He notes that Santander UK has almost no exposure outside of the country. The banks £12 billion of UK investments consist entirely of UK assets.

The company has £170 billion of exposure in residential mortgages and £30 billion in small business loans, which are mostly within the British economy. In the last six months of 2011, Santander UK received 208,994 new PPI complaints.In April, the company said that had set aside £550 million to cover PPI compensation.

While the Moody’s downgrade and other events in the Eurozone may cause customers to worry about their PPI claims, there is no need for such fears. No evidence exists that indicate Santander UK will suffer a substantial blow from its parent company’s woes.


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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.