Moody’s downgraded French banks BNP Paribas, Crédit Agricole and Société Générale today (Friday) because of the impact of funding constraints and deteriorating macroeconomic fundamentals.

BNP Paribas and Crédit Agricole were downgraded from Aa2 to Aa3 and Société Générale from Aa3 to A1. The outlooks on the banks are negative.

As large banks in the euro area, said Moody’s, the three issuers are “necessarily affected by the fragile operating environment for European banks”.

The rating agency said: liquidity and funding conditions have deteriorated significantly for the banks, which have historically made significant use of wholesale funding markets; the banks’ deleveraging plans will likely help somewhat to reduce their need for wholesale funding, but there are mounting associated risks; and the banks retain exposure (to varying degrees) to sovereigns and their economies.

The bank financial strength ratings on the banks were downgraded prior to the bank ratings being downgraded, reflecting Moody’s view that liquidity and funding constraints are now offsetting previous, prevailing credit positive factors such as high diversification, strong franchises, and stable earnings.

Moody’s said BNP Paribas now incorporates three notches of systemic support, derived from the rating agency’s view that the probability of systemic support for BNP Paribas remains very high.

Crédit Agricole Group realised significant impairments on its Greek bond holdings, said Moody’s, commensurate with the rating agency’s own expectations earlier this year. The bank wrote down 60% of its gross exposures of which a material part are held by its insurance subsidiaries.

Moody’s rating on Société Générale now incorporates three notches of systemic support (previously two notches), because of the rating agency’s view that the probability of systemic support remains very high. The rating agency continues to recognise important credit strengths for Société Générale, notably a high degree of diversification, a broad spread of business with good market positions, as well as sound overall loan book quality.