You can say all you like about yesterday's banking downgrade being "anticipated", "reflecting methodology changes" and not "impacting on consumers" - but down is still down. It's the wrong direction.

So despite the spin suggesting this is no big deal, the big Australasian banks should hopefully be paying close attention to the Standard & Poors review which saw their ratings cut from AA to AA-.

That's still solidly in investment-grade territory and it would be silly to suggest there had been any material jump in the risk that your bank might lose your weekly paycheck.

Markets have been largely unmoved by the news because they've been expecting it.


And it's true when the banks say this downgrade reflects a methodology change at S&P which has been well flagged.

In fact, the banks are somewhat relieved they have been cut only one notch and will retain their AA status. That means the move is unlikely to impact significantly on their borrowing costs and won't change anything much for consumers.

The agency has been warning since the start of the year that its new criteria would mean downgrades for a number of banks around the world.

"We have been very clear that there there will be modest change in the ratings across the global portfolio of banks," the agency said in a discussion document published in April.

This week, the ratings on Goldman Sachs and Bank of America were also cut from A to A-. UBS was reduced from A+ to A. So at AA- our banks remain a notch or two above all those heavyweights.

But taking a step back from the technical stuff, it's important to recognise that this methodology change is not some just arbitrary fiddling with numbers.

It's grounded in the very real increase in risk to lenders that has occurred since the global financial crisis struck.

The changes stem from the failure of the ratings agencies to identify that crisis in 2007 and 2008.


So, in some respects, this downgrade represents the credit agencies doing their job properly - finally.

The big shift in the way S&P now looks at banking risk is that it has weighted its focus away from the cyclical ups and downs which are reflected in an institution's quarterly financial performance and towards the underlying structural risks of a region's banking sector.

So now, S&P is analysing first the structural risks in the Australasian banking system as a starting point, and then assessing the relative position of each bank's performance within that context.

That's a sensible move but it's one that risks letting individual banks off the hook a bit. It becomes easier for them to shrug their shoulders and say "well, it's not our fault, we're still doing fine".

Collectively, Australasian banks need to be moving to address the structural risks that remain very much with us as the financial crisis rolls on through its European tour.

The four big banks - ANZ, Westpac, Commonwealth Bank (which runs ASB here) and National Australia Bank (which runs BNZ) - are making good profits again.

They have the opportunity to further strengthen their balance sheets and reduce reliance on short-term wholesale funding. In fact, the banks will be quick to point out, they have been doing that since 2008 and they remain in a relatively strong position compared to their international peers.

But the pressure on directors and chief executives to use those profits to boost dividends and reinvest in expansive growth strategies must also be strong right now.

With the risk of serious banking implosion still on the cards in Europe, there is every reason to stay vigilant in this area.

If that wasn't obvious before, then yesterday's move by S&P should have made it loud and clear to those in charge of our money.

There is no room for complacency. The banks should not placidly accept that sticking around on AA- is okay. There should be strategies in place for returning local banks to the more solid AA rating.

The big four local banks got through the 2008 crisis well enough. But they needed a taxpayer guarantee just to be sure. In New Zealand we've paid for that with unfortunate side effects such as the South Canterbury Finance bailout.

In the light of all the banking carnage the world has seen in the past four years, the local players owe it to us to put safety first. dann