lloyds branchAP

Ratings agency Moody's certainly knows how to create panic. After setting off a massive market collapse by downgrading the status of the US government debt, it has followed it up by downgrading the credit status of 12 UK banks, including major institutions such as Lloyds TSB, RBS, Santander UK and Nationwide.

So should we be worried?


The downgrade
In all it has downgraded the status of 12 banks, bringing Lloyds TSB and Santander UK down one notch and RBS and Nationwide down two.

This was designed to reflect its belief that the government is less likely to bail the banks out if they get into trouble.

It split the downgrades into three categories. It said RBS and Lloyds still had a "high likelihood of support". It said Nationwide, Santander UK, Co-operative Bank, and Clydesdale Bank had a "moderate or high likelihood of support". It also listed those with a "low or no likelihood of support" including the Newcastle, Norwich & Peterborough, Nottingham, Principality, Skipton, West Bromwich and Yorkshire.

Time to panic?
It tried to fend off panic by saying that it doesn't "reflect a deterioration in the financial strength of the banking system". The markets have taken this reasonably well, and after initial sharp falls have recovered somewhat.

However, this is unlikely to soothe savers. Paul Richardson, of Surrey-based Concept Financial Planning says anyone with money in the bank is likely to feel decidedly uneasy. "Consumer confidence is already weak but what Moody's has done could make things even worse. The Chancellor has done his best to reassure savers, saying he is confident that British banks are well capitalised. But many savers will immediately feel more exposed on the back of this news."

He added: "That Moody's insists that these downgrades do not reflect a deterioration in the strength of the banking system is irrelevant. This is all about perception and the perception will only be bad. Moody's will have its reasons, of course, but many will see this mass-downgrade as an overreaction - and one that could do the banks and the country serious damage if it causes panic."

The key here however, is not to panic. This change isn't about the likelihood of failure, so this isn't a warning of imminent crisis. It is worth taking sensible precautions. If you have more than £85,000 in savings with any one institution, then it pays to be a bit more careful, and spread your money further, because the government only promises to refund the first £85,000 if the bank was to collapse.

However, this is not a good reason to start withdrawing savings, or stash cash under the mattress - which simply opens you up to the far higher risks of burglary and inflation destroying the value of your savings.

It pays to be careful, but not so careful that you start to create problems for yourself.