Royal Bank of Scotland's credit standing felt the full force of chief executive Stephen Hester's controversial departure on Thursday.

The news came as a surprise to the markets, and it soon emerged that it wasn't the ceo's decision to leave. Hester was well-regarded in the City, and the future of the bank now looks less certain.

The government may be preparing the bank for privatisation before the next election, though it insists that there is no firm timetable. RBS's eventual structure - the creation of a "bad bank" is one possibility - is also up in the air.

Markets hate uncertainty, so it was little surprise that there was a negative reaction in the firm's CDS spreads. RBS widened by 15bps to 199bps, and has now given up more than 60bps since the beginning of May.

It is trading about 40bps wider than rival Lloyds, which is also partly owned by the UK government. This is the widest differential since October 2008. Unless the government provides clarity on RBS's situation and leadership, then it could see this risk premium persist.

Standard Chartered is regarded as one of the strongest banks in the UK. However, it has underperformed in recent weeks, and its spreads (156bps, +10) are now trading wider than Barclays for the first time since August 2009.

Standard's solid franchise in Asia is commonly seen as one of its advantages over its competitors, but concerns over its exposure to China - partially triggered by comments from short-seller Muddy Waters - have contributed to recent credit deterioration. It has widened a considerable 73bps since early May, and is no longer one of the tightest names in the Markit iTraxx Senior Financials.

RBS and Standard Chartered aside, financials held up relatively well, as did spreads in the broader market. This was impressive given the sharp sell-off in Asia, where the Markit iTraxx Japan index widened by a massive 11.25bps to 111.25bps. By late afternoon, European indices were more or less flat on the day.

Another positive was the resilience of emerging markets. Spreads stabilised after a tough start to the week, and eastern European and Latin American names managed to recover some ground.

Download full article