The FINANCIAL --  As the UK financial sector slowly emerges from the recent crisis, the extraordinary support from which the country"s banking system has benefited is likely to be gradually withdrawn, Moody"s Investors Service says in a new Special Comment.

As a result, Moody"s expects that -- over the next one to three years -- it will phase out the extraordinary support assumptions currently incorporated into the senior debt and deposit ratings of a number of UK financial institutions and revert to its lower, pre-crisis support assumptions. Any resulting rating migration is expected to be gradual.

 "Over the last 18 months, the UK banking system has benefited from extraordinary support provided by both the government and the Bank of England. Given the systemic nature of the crisis, whereby the failure of any bank had implications for the overall system, in the case of a number of rated institutions Moody"s increased its assessments of the likelihood that the entity would receive systemic support in the event of need," says Elisabeth Rudman, a Moody"s Vice-President–Senior Credit Officer and author of the report.

These increased support assumptions have provided stability for the senior debt and deposit ratings of some banks whose standalone bank financial strength ratings (BFSRs) have been downgraded by Moody"s during the crisis, in many cases by several notches and into non-investment grade territory -- an indication of their fragile standalone creditworthiness.

"As the UK authorities implement their strategy to phase out the provision of extraordinary liquidity support to the UK banking sector and, in the long term, solvency support for banks, Moody"s expects to reduce the extraordinary systemic support assumptions factored into our debt and deposit ratings and return to our lower pre-crisis support assumptions," Ms Rudman says. "As a result, our approach to assessing institutions" probability of receiving systemic support will revert to a case-by-case assessment of the impact of a failure of the bank on the system"s financial stability."

Moody"s Special Comment discusses the background to these developments and the triggers that the rating agency will assess in its analysis to determine the appropriate degree and timing for removing extraordinary support assumptions from individual institutions" senior debt and deposit ratings. Key determining factors will include the importance of the bank and the pace of recovery of the UK economy. Moody"s will also assess on an ongoing basis the extent to which legal and regulatory developments in the UK may reduce the likelihood of "normalised", i.e. non-extraordinary, levels of support being extended.

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