Fitch: EC bank proposals to weaken state support in long term

Given that an estimated third of banks in Europe are rated above their standalone strength, Fitch Ratings says it will keep the European Commission’s proposals for avoiding future bank bailouts under review.

The European Commission’s proposals to avoid future bank bail-outs represent another important step in a series of policy and regulatory initiatives to curb systemic risk posed by the banking industry, even if the bail-in proposal is not applied until 2018. Policy initiatives include enhancing oversight of the banking industry, improving its intrinsic safety and removing sovereign support for EU banks.

The implementation of the proposals represents a huge challenge, especially for the large, systemically important financial institutions, but the proposals will ultimately result in us factoring less support into EU bank ratings in the coming years. We consider sovereign support for the banking sector as likely to remain strong for now under most reasonable scenarios, particularly within the eurozone, and therefore do not expect immediately to remove the explicit uplift we factor into some EU bank ratings.

In the EU, over a third of banks are rated above their standalone strength on the basis of sovereign support and would therefore be at risk of being downgraded if the support was removed or were we to be given cause to change our assumptions around the high level of support available to major eurozone banks during the current crisis.

Nonetheless, we also believe the resolution elements of the EC’s proposals need to be considered in conjunction with the recovery aspects and other measures being taken to strengthen EU banks, notably the Capital Requirements Directive IV, which ought ultimately to be positive for bank standalone ratings.

While the availability of support remains high for the major banks, we have already started to reduce the benefit of support in the UK. The UK banking system is large relative to the economy and there is also more advanced political will to reduce the implicit support for the country’s banks, building on The Banking Act 2009 and, more recently, the various policy recommendations of the Independent Commission on Banking.

Building a framework to enhance market discipline and remove government financial support for troubled banks has been a focal point for bank regulators globally. The response in the US has been the most pronounced in terms of definitive legislative action. As a result, the number of US banks that Fitch believes would receive support if needed has been cut in half. Fitch now views the eight most prominent and systemically important banks as the sole candidates for support. The Support Rating Floor for these banks is now at ‘A’.

The EC’s aim is that if a bank cannot be saved via its own recovery plan then national regulators should be able to rescue the critical functions at the expense of the bank’s shareholders and creditors rather than taxpayers. The EC approved €4.5trn of state aid measures between October 2008 and October 2011. Fitch will publish a more comprehensive review of the EC’s proposal after thorough review.


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