RPT-Fitch: Single bank resolution fund positive for sovereign credit
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July 12 (Reuters) - (The following statement was released by the rating agency)
The European Commission's proposal for a single resolution mechanism (SRM) to increase objectivity and effectiveness in resolving weak banks, and pool some of the costs would be credit positive for sovereigns, Fitch Ratings says. It will reduce the potential costs to a single sovereign of a bank failure - but will not have as great an impact on sovereigns' contingent liabilities as the proposed minimum bail-in requirement under the Bank Recovery and Resolution Directive (BRRD).
A single resolution board making objective and balanced decisions could reduce hesitation in the intervention and resolution of a bank. A more efficient process may reduce total costs so the burden can be borne by shareholders and bondholders, followed by the resolution fund if necessary, limiting costs for the sovereign.
However, the complexity of European banks means that resolution is unlikely to be clear cut in practice. For example, where group resolution involves banking subsidiaries or parents not in the banking union, the process could be complicated by the involvement of more national authorities.
A single resolution fund would benefit from pooled resources, so shortfall risks are lowered compared to smaller national funds that would have to negotiate borrowing from others if necessary. This would likely be most beneficial to smaller countries. A common funding arrangement, pre-financed by the banks, would lessen the burden on individual sovereigns if a single bank fails, but funds are unlikely to be sufficient to make much of a dent in capital or liquidity needs in the case of another systemic crisis in European banks. Under the proposals, it would still be possible for an individual state to decide to support a bank directly, in agreement with the resolution board, if losses are exceptionally large or resolution funds insufficient. The resolution fund would then raise additional contributions to repay public funding where this cannot be recouped from the failed bank. This would also apply to the European Stability Mechanism's (ESM) EUR60bn funds set aside for bank recapitalisation. The SRM is designed to ensure that the ESM backstop is fiscally neutral in the medium term, which could be of some benefit to sovereign ratings.
This mutualisation of the cost of the bank-financed resolution fund is likely to be subject to active political debate when the proposal is discussed by the European Council and Parliament later this year. Banks in the banking union would need to contribute over EUR55bn over time to the fund under this proposal. Those with riskier profiles and more wholesale funding would pay more. But there could be substantial changes to the SRM before it is finalised.
We view progress towards banking union as positive for investor confidence in eurozone sovereigns, Europe's banking sector and the vast majority of banks. The SRM is the second and probably final pillar of the union now that some form of depositor preference will be built into the final BRRD. The first pillar, the single supervisory mechanism (SSM) centred on the ECB, should enhance consistency and comparability of risk measurement and reporting.
Final decisions on SSM, SRM and BRRD are scheduled to be reached by year-end. Increased regulatory certainty could then help restore investor confidence in banks, although investors are likely to differentiate more between weak and strong banks, if proposals mean sovereign support is weakening.
The Commission proposes that the SRM would be directly responsible for the resolution of all banks in countries participating in the banking union. This would include the eurozone and other countries in the EU electing to join the SSM.
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