This article appeared in the Adviser Magazine.

Moody’s investors service has cut the rating of Australia’s big four banks after it said the lenders rely too much on offshore debt.

The global credit agency downgraded the long term, senior unsecured debt rating of Australia’s four major banks to Aa2 from Aa1.

Speaking about the downgrade, Moody’s senior vice president Patrick Winsbury said the new rating reflects the credit agency’s view of the Australian banking system’s structural sensitivity to conditions in wholesale funding markets.

“Australia’s major banks have relatively high levels of wholesale funding – at about 40 per cent of liabilities on average- and the global financial crisis has underlined the speed with which shifts in investor confidence can impact bank funding,” he said.

“While the major banks have reduced their sensitivity to disruptions in the wholesale funding markets, the Australian financial sector’s long-term, underlying reliance on offshore debt remains in place, and which Moody’s believes is better reflected at the Aa2 rating level.”

The decision forced Australia’s big banks on to the defensive, with each lender arguing the downgrade would not mean the lenders would have to pay more to borrow money, which could in turn put upward pressure on home loan interest rates. CBA treasurer Lyn Cobley said the downgrade did not present a threat to the bank and would have “no material impact” on its funding plans.

I wonder if the banks are just saying this to protect their share price. It would be interesting to see if the banks put up rates outside the Reserve Bank guidelines or whether they balance the downgrade in ratings, which they currently state will have no material impact.