Some governments have seen their ability to support their national banking systems eroded by the effects of the financial crisis, and so ratings on banks in these countries may be affected, says Moody’s Investors Service.

In a new report, Moody’s examines how the financial crisis is affecting the ability of governments and their central banks to support their banking systems. The rating agency believes that most governments are at least as likely, if not more likely, to support their banking systems as they are to service their own debts.

However, it also says that the erosion in underlying credit fundamentals and reduced policy flexibility of many governments have prompted a review of the level of systemic support for banks in countries with sovereign ratings below the triple-A level. As a result, the rating agency expects to take rating actions on bank debt and deposit ratings of some banks.

Moody’s notes that throughout the financial crisis, nearly all governments have aggressively supported their banking systems, but that “the prolonged and widespread nature of the crisis has stretched government resources and restricted their policy options in supporting banks. These restrictions include preserving countries’ fiscal health, currencies, and financial markets. They increase risks for bank creditors compared to the pre-crisis world that focused on the avoidance of a systemic bank crisis triggered by individual institutions’ failure.”

“As the financial crisis broadens and continues, the capacity of a central bank to support its banks converges with, and is constrained by, the government’s own debt capacity,” says Moody’s managing director, Greg Bauer. “Even central banks are limited in their ability to ‘print money’ to support their banking systems because of onerous consequences such as high inflation or reduced access to capital markets.”

Moody’s says that bank ratings in Aaa-rated countries, and in a handful of countries rated below Aaa, will not be affected by this analysis as these governments have a high ability to support their banking systems. However, it will re-consider government support on a country-by-country basis, and announce rating reviews and rating adjustments for banks when appropriate. In some cases, such as for certain central European countries, Moody’s has already considered practical government limitations to support banks as part of recent rating actions, it notes.

IE