London - Moody's Investors Service has revised down its outlook on British banks, saying new regulations designed to prevent taxpayers having to stump up funds to rescue failing banks make them more risky investments.

Moody's said on Tuesday it had downgraded its view of the sector to 'negative' from 'stable', citing plans by Britain's financial regulator to introduce new rules for the rescue of ailing banks and to force lenders to ring-fence their retail operations from riskier investment banking operations which could be allowed to fail.

In the past, British banks had benefited from an implicit guarantee that the government would not allow them to fail.

The new regime would see bondholders and big depositors take hits when large banks need rescuing.

Britain pumped a combined 66 billion pounds (R1.2 trillion) into Royal Bank of Scotland and Lloyds Banking Group to prevent their collapse during the 2008 financial crisis.

Moody's said the new rules “are designed to prevent the use of taxpayer funds to support failed institutions and to facilitate the going-concern loss-absorption of creditors, including senior unsecured bondholders”.

“The key driver of the change in outlook to negative for the UK banking system is that the UK government is now able to finalise the secondary legislation to implement the structural reforms relating to the UK resolution and bail-in regime and the related ring-fencing framework,” said senior Moody's analyst Carlos Suarez Duarte. - Reuters