Lloyds and RBS shares fall on Fitch downgrade

Banks shares extended losses this afternoon as Fitch Ratings downgraded Lloyds and RBS' long-term credit rating from AA- to A and placed Barclays on a negative watch.

Fitch said the dynamics of state support for the banks have changed, and there is now more political will to withdraw support for these major UK financial institutions, building on the recommendations of the Independent Commission on Banking.

It added the move to place Barclays on a negative watch reflects its view that global trading and universal banks have business models that are particularly sensitive to market sentiment and confidence.

Shares in the banks, which were already lower prior to the announcement, fell further in reaction to the downgrades.

At 1.30pm Lloyds had fallen 3.7% to 34.9p, while RBS fell 2.25% to 25.2p, and Barclays was down 3.9% to 179.7p.

Last week the shares took a battering as Moody's announced downgrades of Lloyds and RBS.

Moody's said it had reassessed the support environment for banks, which had seen support for five large institutions reduced by between one and three notches.

"Actions already taken by UK authorities have significantly reduced the predictability of support over the medium to long term," it said.

"Moody's believes the government is likely to continue to provide some level of support to systemically important financial institutions, which continue to incorporate up to three notches of uplift.

"However, it is more likely now to allow smaller institutions to fail if they become financially troubled. The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government."

This week RBS chief executive Stephen Hester warned any further deterioration in the economic backdrop would be certain to hit the bank's results, amid reports Whitehall fears a further bailout of RBS in the event of a broad recapitalisation of Europe's banks.