British regulators have set in place new limits for banks in the United Kingdom — and that could help their credit ratings.

 

The new assessment comes from Moody’s Investors Service, which released a report on the changing rules facing British banks. According to Moody’s, the new rules will help the banks’ creditworthiness, which in turn could improve their profitability in the future.

 

“We expect the standalone credit profiles of the ring-fenced banks to be in line with or stronger than those of the existing bank,” said Moody’s Senior Vice President Alessandro Roccati in a statement.

 

Barclays PLC (BCS), Royal Bank of Scotland (RBS), and HSBC (HSBC) are most exposed to the new regulations because of their size and their heavy dependence on retail banking in the United Kingdom.

 

Despite the expected improvements to the banks’ credit, British bank stocks have seen a massive sell-off in European trading and in pre-market trading in America. RBS fell nearly 3% in pre-market trading, and Barclays fell 1.5%. Only HSBC, which is the least exposed to British retail banking relative to its peers, is up on the news.

 

The regulations are part of the Bank of England’s plans to ensure the banks will not face a liquidity crisis if a severe market downturn, or a sudden spike in bankruptcies, were to negatively impact the banks’ debtors.

 

Britain’s central bank has previously assured the market that the new regulations will have a limited impact on banks, but Moody’s disagrees. Its assessment holds that the credit fundamentals of each bank impacted by the regulations will likely change, and it could make those banks more durable in the face of a downturn.

 

It could also lower the interest rates that banks need to pay on debt, if their credit ratings improve following the regulations. That in turn could help improve the spread between the rate at which the banks borrow money and the rate at which the banks lend money to debtors.

 

A boost to profitability would be a welcome reprieve for British banks. Barclays saw net income of -£49 million (or $63.5 million) in 2015, while RBS saw net income of -£1.6 billion (or $2.1 billion) for the same year.

 

Thanks to its exposure to Asian markets where credit spreads are higher, HSBC saw a healthy net income of $13.5 billion in 2015, down slightly from $13.7 billion the prior year.

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