Evolving banking regulation to impact ratings for weaker banks – Fitch

Monday, 13 June 2011 00:00 - - {{hitsCtrl.values.hits}}

London: Fitch Ratings last week at its Global Banking Conference in London warned that the impact of evolving bank resolution regulation on government support for banks will result in lower ratings in future for weaker banks.

“Bank support is a key part of Fitch’s bank rating analysis. However the signs are that new resolution regimes will limit support as they aim to ensure that the cost to taxpayers is reduced,” says Gerry Rawcliffe, Managing Director in Fitch’s Financial Institutions team.

“As state support erodes, we expect more volatility in bank ratings over the next decade. This will however be counterbalanced by limiting the likelihood of banks failing through implementation of better micro and macro-prudential regulation and structural reform of financial markets.”

In anticipation of tougher regulation and in response to market and regulators’ concern about the safety of banks coming out of the crisis, banks are continuing to increase capitalisation, with average tier 1 capital ratios approaching 12% at 100 of the world’s largest banks globally.

Banks are almost 10 times more likely to fail than they are to default over a five-year period, according to Fitch data for the past 20 years. The difference has been the role that governments have played in supporting failed banks.

Globally, 12% of banks rated in the “AA” range by Fitch are reliant on support for their ratings. This rises to 40% of “A” range rated banks which are reliant on support for their ratings. The impact of regulation on future state support is therefore important for a significant number of Fitch’s higher bank ratings.