Moody's on Friday downgraded its credit ratings for a dozen British lenders, including state-rescued Royal Bank of Scotland and Lloyds TSB, due to the removal and curtailment of government financial support.

Moody's said it chose to downgrade five large banks and seven small ones as government action had "significantly reduced the predictability of support over the medium to long-term."

The downgrades did not concern major lenders HSBC, Barclays or Standard Chartered, the agency said in a statement. But it added that it believed Britain's government was now more likely to allow small lenders to fail if necessary.

The announcement comes as the European Union seeks swift recapitalisation of the region's banks to avert the eurozone debt crisis spreading across borders.

Moody's had warned in May that it could downgrade British banks.

Its decision to follow up that warning could now result in banks facing higher rates of interest when looking to borrow money on markets, further hindering their attempts to return to better health.

Affected lenders' share prices slumped in London trade after the downgrades, with Royal Bank of Scotland (RBS) down 3.53 percent at 23.5 pence and Lloyds Banking Group, the parent of Lloyds TSB, losing 3.64 percent to 34.56 pence.

At the same time, in midday trade, London's benchmark FTSE 100 index was down 0.41 percent at 5,269.74 points.

RBS said it was "disappointed" that Moody's had "not acknowledged the (bank's) progress... in strengthening" its credit profile.

"We do, however, see the removal of implicit government support for the UK banking sector as being a necessary and important step forward as the sector returns to standalone strength," it added in a statement.

The Financial Times newspaper meanwhile reported on Friday that the British government feared the prospect of injecting RBS with fresh capital under Europe-wide recapitalisation plans.

RBS received billions of pounds of taxpayers money under one of the world's biggest-ever bank bailouts in the wake of the 2008 financial crisis, leaving it currently 83-percent owned by the British government.

Moody's stressed on Friday that its financial sector downgrades did "not reflect a deterioration in the financial strength of the banking system or that of the government."

Britain's finance minister George Osborne said that despite the downgrades, he was confident that British banks were not facing the same problems as their eurozone peers.

"I am confident that British banks are well capitalised, they are liquid, they are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment," he told BBC radio.

Chancellor of the Exchequer Osborne said the downgrades were in fact evidence that Britain's coalition government was taking the correct action in removing support from the banks.

"As I understand it, one of the reasons they (Moody's) are doing this is because they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain," he added.

Moody's said it had downgraded RBS and Nationwide Building Society each by two notches to A2 from Aa3; Lloyds TSB Bank and Santander UK were cut by one grade to A1 from Aa3; the Co-Operative Bank was downgraded one level to A3 from A2.

"Moody's Investors Service has today downgraded the senior debt and deposit ratings of 12 UK financial institutions and confirmed the ratings of one institution," the agency said in a statement.

"The downgrades have been caused by Moody's reassessment of the support environment in the UK which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support... for five larger, more systemically important financial institutions."

Moody's said it "believes that the government is likely to continue to provide some level of support to systemically important financial institutions... However, it is more likely now to allow smaller institutions to fail if they become financially troubled."

(AFP)