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Moody’s has downgraded the credit ratings of five big Dutch banks, citing their exposure to the Netherlands’ shrinking economy and falling real estate market as well as their reliance on non-domestic and wholesale funding, which leaves them vulnerable to conditions in other European countries.

Moody’s dropped the ratings of Rabobank, ING, ABN Amro and car-related group LeasePlan by two notches each, while lowering the rating of SNS Bank by one notch. In addition, the agency placed ING’s rating on negative watch, while leaving the other four banks on stable.

Carola Schuler of Moody’s said ING had been placed on negative watch because of its particularly heavy reliance on non-domestic deposits. That could make it vulnerable if worsening conditions in some European countries lead their banking regulators to impede the free flow of funds.

“We observe across Europe a trend of national regulators to manage liquidity of subsidiaries of foreign banks in their countries more stringently than in the past,” Ms Schuler said. “For a truly pan-European group this poses a particular challenge, and under a stress scenario we could picture non-domestic deposits becoming less fungible.”

Moody’s said it expects the Dutch economy, which has been in recession for three quarters, to shrink 0.6 per cent in 2012. It expects housing prices to continue the decline that started in 2009, leaving banks to cope with lower collateral and rising rates of non-performing loans.

But the agency said the banks have so far retained access to the wholesale funding they need, and that asset quality remains sound. Moody’s noted ING had taken steps to allocate capital efficiently and ensure access to liquidity.

Ms Schuler said the worsening situation in Spain did not play a big role in the ratings downgrade, as none of the banks’ exposures to Spain are significant in comparison with their balance sheets.

SNS is the weakest of the five banks and the most exposed to mortgages. The fact it was downgraded less than the others raised some eyebrows among analysts. Moody’s had suggested when launching the review that it might drop as much as three notches.

Ms Schuler said the review had found that SNS had attracted significant new retail deposits. The other four banks had loan-to-deposit ratios of between 122 and 165 per cent, leaving them dependent on wholesale or non-domestic funding to finance lending.