RPT-Fitch: New EU Resolution Rules Mark Progress in Removing Support

Wed Jun 18, 2014 6:53am EDT

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June 18 (Reuters) - (The following statement was released by the rating agency)

The Bank Recovery and Resolution Directive published last week in the EU Official Journal is an important building block for effective resolution and underpins our view that extraordinary support for senior creditors is becoming less likely, Fitch Ratings says. Some aspects of resolution are still evolving, but there was sufficient uncertainty about sovereign support to prompt our Outlook revisions in March: around 60 EU bank ratings are now on Negative Outlook because of diminishing support.

The Directive gives authorities a comprehensive suite of resolution tools. We believe the bail-in tool to be the most effective because there are fewer practical hurdles. The legislation also helps address some of these challenges for effective bank resolution. For example, it empowers authorities to make banking groups change their structure to improve resolvability. It also reduces the political flexibility for the state to bail-out banks, although it is still possible. We also believe the Single Resolution Mechanism will weaken national scope to support a bank in the eurozone.

But the minimum requirement for own funds and eligible liabilities and how banks will shift their debt structure to meet this are not yet clear. The recent surge in issuance of junior debt helps provide senior creditors with a larger buffer against bail-in. Banks are likely to continue to adjust this cushion as regulation is clarified and in response to market pressures.

Group legal structures are also likely to change with the greater emphasis on resolvability. The resolution strategy - for example, a single point of entry - is likely to influence the group structure, where business is booked and where debt is issued. Structural changes may be combined with other initiatives like ring-fencing. The risk profile of legal entities within a group may alter as these shifts take place.

Nevertheless, we believe sufficient progress has been made toward removing or reducing sovereign support within one to two years - hence the Negative Outlook for affected banks. We expect to remove or reduce sovereign support from these bank ratings in late 2014 or in 1H15. This is likely to result in downgrades.

Fitch is discussing changes in support dynamics for banks at its annual Global Banking Conference in Frankfurt, Madrid, Paris and London this week. For more details, see here

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