Banks
Global
Sovereign Support for Banks
Rating Path Expectations
Special Report
In 2H13, Fitch outlined three rating paths
for Support Ratings and Support Rating
Floors (SRFs) in light of evolving bank
resolution frameworks. This report updates
our expectations of the impact of
impending regulations and supervisory
/legislative change on those paths.
Path 1: No immediate change to
sovereign support propensity nor SRFs.
Path 2: Weakening of sovereign support
propensity and likely downward revision of
SRFs by the end of an Outlook horizon.
Path 3: More material weakening of
sovereign support propensity such that
support, while possible, is unlikely to be
able to be relied upon and SRFs are likely
to be ‘No Floor’ by the end of an Outlook
horizon.
Support Influence on Default Risk: Support, in particular from sovereigns, has had a major
positive influence on bank and financial institution (FI) default risk over many years. For example,
between 1990 and 2012, it reduced the cumulative five year default rate on Fitch’s FI portfolio
approximately six-fold (1.15% default rate versus 6.95% failure rate).
Support Dynamics Evolving: In response to the recent banking and financial crises, the US,
EU and Switzerland have been at the forefront of the bank resolution legislative agenda, whose
goals include pushing the cost of future bank bailouts onto shareholders and creditors of banks,
rather than taxpayers. In most other regions, strengthening bank resolution frameworks has
been a much lower priority.
Rating Changes Now Likely: In the US, EU and a handful of other countries, Fitch believes
sufficient progress has been made for downward revisions of Support Rating Floors (SRF) to
be likely within a standard rating Outlook horizon. The affected banks are either on path 2 or
path 3 (see sidebar). For around 65 of these banks whose Long-Term Issuer Default Ratings
(IDR) are driven by their SRFs, this is likely to result in downgrades of these ratings. These
ratings are on Negative Outlook.
EU Banks Most Affected: The EU’s proposed Bank Recovery & Resolution Directive (BRRD)
is due to be approved by the European Parliament in April. Fitch believes extraordinary support
for senior creditors, while still possible under BRRD, is becoming sufficiently uncertain to justify
the majority of EU banks being on path 3. A small number of mostly public sector or wind-down
banks are on path 1 or 2. In addition, the major Swedish banks are on path 2.
For banking union countries, the compromise on the Single Resolution Mechanism (SRM) was
complicated, but broadly in line with policy objectives. The resolution process will still involve
multiple parties and will result in a dilution of national influence over resolution decisions.
Related Research
Sovereign Support For Banks: Update On
Position Outlined in 3Q13 (December 2013)
The Evolving Dynamics of Support for Banks
(September 2013)
Bank Support: Likely Rating Paths’
(September 2013)
Analysts
James Longsdon, EMEA
+44 20 3530 1076
[email protected]
Joo-Yung Lee, North America
+1 212 908 0560
[email protected]
Franklin Santarelli, Latin America
+1 212 908 0739
[email protected]
Jonathan Cornish, APAC
+852 2263 9901
[email protected]
David Weinfurter, Global Head
+44 20 3530 1505
[email protected]
www.fitchratings.com
North America Also Affected: Eight US banking groups not already at ‘No Floor’ are on path
3, reflecting the improved framework for large bank resolution provided by the Orderly
Liquidation Authority (OLA). The single point of entry (SPE) resolution model favoured in the
US means IDRs of holding companies and main operating banks are increasingly likely to
diverge (see US Bank HoldCos and OpCos: Evolving Risk Profiles).
Major Canadian banks are on path 2. The Canadian authorities have taken steps to improve
resolution powers and tools, but intend to maintain a flexible approach to bank resolution.
Less Urgency Elsewhere: More effective bank resolution frameworks or imposing losses on
senior creditors of failed banks are less of a priority in APAC, Latin America and the Middle
East. Nonetheless, some countries are broadly sympathetic to its principles, meaning support
assumptions may weaken at some point beyond the rating horizon. With the exception of Hong
Kong (path 3), all countries with bank SRFs above ‘No Floor’ are on path 1.
FSB Countries, Mixed Paths: The Financial Stability Board (FSB) has been at the heart of the
effective bank resolution movement. Nonetheless, some member countries are on path 1,
where, for example, Fitch believes there is no real urgency to apply the FSB’s effective
resolution principles. FSB member countries whose banks are on path 1 are: Japan, Australia,
Singapore, China, India, Indonesia, South Korea, Brazil, Mexico, Turkey, Saudi Arabia and
Russia. The SRFs of Argentina’s banks are already ‘No Floor’.
27 March 2014
Banks
Context
1
In H213 Fitch published three reports addressing the evolving dynamics of support for banks.
Support has reduced financial institution (FI) default risk among Fitch’s portfolio of FI ratings
approximately six-fold on a five year cumulative basis over the period 1990-2012 (see Figure 1
and also Global Bank Rating Performance Study: 1990-2012, available at
www.fitchratings.com).
Figure 1
The Value of Support: Bank Failure vs. Default Rates (1990-2012)
Failure rates YE89-YE12
Bank failure
Bank default
Corporate default
(Cumulative rate)
8
6
4
2
0
1yr
2yr
3yr
4yr
5yr
Source: Fitch
This report outlines the base case paths we expect countries and/or banks within those
countries to follow. Path 1 countries are those where we see no material change in support
propensity towards the commercial banking sector in general at this stage, whether for
philosophical or policy reasons, a question of priorities, the legislative situation or simply inertia.
Path 2 countries are those where we see support propensity towards the commercial banking
sector in general as weakening but still probable. Path 3 countries are those where we see
support for the commercial banking sector as weakening more materially to the extent that,
while support is still possible for a failed bank, it will ultimately no longer be able to be relied
upon.
2
When applied to banks, the paths effectively suggest the likely trajectory over an Outlook
horizon of Support Ratings and Support Rating Floors (SRF), assuming no material change in
a sovereign’s ability to provide support. For path 1 banks this would be no change, for path 2
banks a downward revision and for path 3 banks a downward revision to Support Rating ‘5’
(where external support cannot be relied upon) and ‘No Floor’.
Annexes 1-5 outline Fitch’s conclusions by region. Annex 6 summarises in table format Fitch’s
base case paths for banks in path 2 or 3 countries. It is possible that information will come to
light that would cause us to change either our path assessment or the timing of ultimate rating
changes, but the paths outlined in Annex 6 represent our best estimates at this point.
Even in path 3 countries, improving resolution frameworks is still a work in progress, which is
the main reason that SRFs of path 2 and 3 banks have not been revised downwards
immediately. For the world’s largest banks, especially those operating in multiple jurisdictions,
resolution will be complex and will involve uncertainty as to its consequences and effect on
financial stability. Changes in legislation need to be accompanied by resolution planning and
potentially changes in group structures and capital/funding structures in order to maximise
resolvability and minimise risk.
Sovereign Support for Banks
March 2014
1
See The Evolving Dynamics of Support for Banks, Bank Support: Likely Rating Paths and
Sovereign Support For Banks: Update on Position Outlined in 3Q13 at www.fitchratings.com
2
Support Ratings and SRFs are not formally assigned Outlooks.
2
Banks
Figure 2
DM Support Levels
Support
Driven
Viability
Driven
Support from
Parents that
are State
Pure
Supported
Parental
3%
Support
10%
It is important to remember that Fitch’s definition of a Support Rating of ‘5’ - the lowest Support
Rating and the one to which banks on path 3 are likely to migrate - does not mean
extraordinary support for a failed bank will never occur. Indeed, extraordinary support may still
occur even for banks on path 3, but in essence we would be saying that it is no longer
3
probable .
Rating Action Summary and Next Steps
Path 1 Banks
State
Support
18%
VR
Driven
69%
Source: Fitch
There are no immediate rating implications for banks on path 1. Some of these banks are in
jurisdictions that may, over time, look to improve bank resolvability and reduce implicit
sovereign support for banks (eg, in certain FSB member countries), but there is not sufficient
visibility over this yet to affect ratings. Others may reside in countries where it is very difficult to
envisage any change in the sovereign support propensity.
Path 2 and Path 3 Banks
Figure 3
DM Europe Support
Levels
Support
Driven
Viability
Driven
Support from
Parents that
are State
Pure
Supported
Parental
4%
Support
9%
State
Support
28%
VR
Driven
59%
Source: Fitch
Figure 4
DM Asia/Australasia
Support Levels
Support
Driven
Support from
Parents that
are State
Pure
Supported
Parental
5%
Support
16%
Viability
Driven
State
Support
10%
VR
Driven
69%
Source: Fitch
Related Criteria
Global Financial Institutions Rating Criteria
(January 2014)
Sovereign Support for Banks
March 2014
In developed markets (DM), around 20% of IDRs were driven either directly or indirectly by
sovereign support assumptions at end-2013 (see Figure 2). This means that 80% of developed
bank IDRs and their senior debt, where rated, are immune to any weakening of Fitch’s
4
sovereign support assumptions. In North America, very few banks’ IDRs are driven by support.
In DM Europe, around a third of IDRs are either directly or indirectly driven by sovereign
support (see Figure 3). In DM Asia/Australasia, around 15% of bank IDRs are directly or
indirectly sovereign-support driven (see Figure 4). However, all of the DM Asia/Australasia
banks are path 1 banks, meaning no change of SRFs is currently envisaged.
On 26 March, Fitch revised the Outlook on 40 banking groups to Negative from Stable,
indicating a likely downgrade at some point by the end of an Outlook horizon due to weakening
of sovereign support assumptions. The overwhelming majority of these were in EU member
countries. The Outlooks on a further 25 banking groups were maintained on Negative Outlook.
For further information, please refer to Appendix 6, to two other Special Reports that will be
published soon by Fitch (Rating Paths for EU State-sponsored Banks and Various Support
Rating Paths for German Banks) and to relevant bank-specific Rating Action Comments and
Rating
Action
Reports
available
at
www.fitchratings.com.
Fitch expects to resolve most Outlooks and revise SRs and SRFs later in 2014 or in 2015. The
timing of rating actions may vary by country and will be driven by Fitch’s continuing analysis of
progress made on bank resolution. The timeframe could be accelerated compared with the
base case if, for example, Fitch has concerns over the availability of support in the near term
for a bank that clearly requires it or if evidence points to Fitch’s assumptions around the timing
of support erosion needing to be brought forward.
For example, there is still some lack of clarity over the timing of application of BRRD’s 8% rule.
BRRD does not require the bail-in tool to be in place until 1 January 2016 and the ECOFIN
5
statement on stress tests from November 2013 speaks to the importance of backstops being
in place because the bail-in tool need not be in place when the ECB’s comprehensive
assessment results are published in 4Q14. However, BRRD seems to imply that any use of
resolution funds (eg, to capitalise a bridge bank) requires 8% bail in. Either this means the
bridge bank tool could be unusable before 2016 in countries that elect not to adopt the bail-in
3
Fitch’s definitions of a ‘5’ Support Rating (SR) state ‘A bank for which there is a possibility of
external support, but it cannot be relied upon’. Higher SRs indicate that extraordinary support, in
Fitch’s opinion’ is ‘probable’ to varying extents (see www.fitchratings.com).
4
Only Bank of America and Morgan Stanley in the US and Bank of Butterfield in Bermuda.
5
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/139626.pdf
3
Banks
rule before then or it means the bail-in tool is effectively applicable from 2015 when other
resolution tools that might involve the use of resolution funds have to be in place.
Rating changes/revisions within the euro area are likely to occur at the same time, given all
countries will be within the banking union, unless Fitch has idiosyncratic/country-specific
concerns. An example could be if European Stability Mechanism (ESM) funds are to be
deployed to recapitalise a country’s bank(s) and such funds come with senior bail-in
conditionality.
Mitigating And Uncertain Factors For Path 2 and Path 3 Banks
Upward Pressure On VRs
In path 2 and 3 countries, supervisory and prudential initiatives to improve banking sector
resilience are also taking hold, which has resulted in a number of VR upgrades over the past
6
year, especially for major banks recovering from the crisis , most recently at Citigroup Inc. and
Lloyds Banking Group on 26 March 2014. Some path 3 banks’ VRs are even on RWP (eg,
Nova Kreditna Banka Maribor and Nova Ljubjanska Banka in Slovenia following their recent
recapitalisations).
In the EU, peer pressure, the phasing in of higher capital requirements under the Capital
Requirements Directive and Capital Requirements Regulation (CRD IV/CRR), the ECB’s asset
quality review and comprehensive assessment exercise on large euro area banks and the
European Banking Authority’s (EBA) EU-wide stress test exercise are all likely to incentivise
further improvements in solvency (if not require it). The themes of stress testing and higher
capital requirements/expectations are similar in the US.
In some instances, this could result in further VR upgrades during 2014/2015, thereby reducing or
even eliminating downward pressure on path 3 bank IDRs that are driven by their SRFs. As an
example, Morgan Stanley’s IDR of ‘A’ remains on Stable Outlook despite it being in a path 3 country
and its VR (‘a-‘) being below its IDR. This is essentially because Fitch believes the VR is likely to be
upgraded (ie, it is effectively on Positive Outlook) by the time the SRF is revised downwards. Should
this not be the case, Morgan Stanley’s IDR would likely be downgraded off a Stable Outlook.
Other Unknown Or Slowly Emerging Factors
Changes to bank resolution legislation may be largely out of banks’ control, but that does not
mean banks will not respond to them of their own accord or only due to supervisory pressure.
In this regard, there are a number of unknown or only slowly emerging, but relevant themes
from a ratings perspective.
The building blocks of more effective bank resolution and strengthening of banking sector
resilience are intended, very broadly, to be part of one continuous and related process.
However, inevitably, certain aspects will evolve at a different pace to others. For example, most
of the provisions of BRRD have to be in place in EU member states by end-2014 (only the
senior bail-in tool is able to be deferred until January 2016). However, the “minimum
requirement for own funds and eligible liabilities” (MREL) requirement and how (eg, in terms of
debt class) banks will be required to/elect to meet or exceed them or how they will interact with
other loss absorption capacity requirements are not yet clear. In the EU, the EBA has been
tasked with drafting a large number of relevant technical standards in respect of the practical
application of BRRD.
From a ratings perspective the multitude of aspects and responses moving at different speeds
presents a challenge. However, while not having all of the building blocks for effective
resolution fully in place increases risks around a resolution process, it is not the same as
concluding that a bank is unresolvable and all senior creditors will be bailed out until that point.
6
Sovereign Support for Banks
March 2014
Other higher profile ones include Bank of America, KBC Bank, Groupe BPCE, UBS, Commerzbank and
ABN AMRO Bank.
4
Banks
Below we cover in more detail three matters that are linked to bank resolution which may, in many
cases, only have rating implications over the medium- and longer-term (ie, while IDRs are on
Negative Outlook or after downward revisions to SRFs have occurred) as further clarity emerges.
Junior Debt Volume
This is a topic raised by Fitch both in The Evolving Dynamics of Support for Banks and
Sovereign Support For Banks: Update On Position Outlined in 3Q13. Since then, Fitch has
published a revised Global Financial Institutions Rating Criteria (January 2014), in which a high
volume of junior debt that does not obtain equity credit treatment was recognised as another
way (other than support) for a bank’s IDR to be higher than its VR. Junior debt, in sufficient
amount, could alone have the ability to restore viability to a bank upon bail in.
There has been a surge in issuance of junior debt recently. This will partly reflect refinancing of
legacy issues. However, the threat to senior creditors from the bank resolution agenda has
clearly put the whole question of capital volume (ie total capital) back on the agenda in some
jurisdictions and at some banks.
Except for a few countries where regulatory expectations are quite well defined (eg,
Switzerland), discussions with regulators and issuers in respect of future capital structures
have often not proven that conclusive, in part because the latter are often waiting to see what
the former expects of them (under MREL in the EU or total debt requirements in the US, for
example). Some jurisdictions may require banks to maintain large buffers of junior debt on top
of their common equity Tier 1 (CET1) requirements and buffers (we expect this in Sweden, for
example), while some issuers may elect to build up (or maintain) sizeable junior debt buffers of
their own accord. Some countries may simply require that banks maintain a minimum amount
of liabilities that can be bailed in (eg, junior debt, senior unsecured debt, possibly even
uninsured deposits) and be neutral as to how banks elect to meet the requirement.
Single Point of Entry Resolution
In the same way that bailing in a large slice of junior debt could be sufficient to restore viability
to a bank and prevent a senior level default, so too could viability be restored to an operating
subsidiary by way of the bail in of the holding company capital structure under a single point of
entry (SPE) approach to resolution.
The practical application of the SPE resolution is nascent in most countries outside the US. In
the UK and Switzerland there is support for the SPE concept (the Federal Deposit Insurance
7
Company and Bank of England even wrote a joint paper on the topic in December 2012), but
banks’ capital structures have not yet been aligned with its principles and there is still
uncertainty about how it will work in the case of large, international banking groups or where
regulators are considering ring-fencing.
Yet SPE has the potential to increase risk and rating differentiation of operating companies
(positively) versus holding companies (negatively). Fitch will shortly publish a report entitled US
Bank HoldCos and OpCos: Evolving Risk Profiles, which considers potential rating outcomes in
the US from its application of the SPE approach to resolution.
Group Structure Changes
In countries where improving bank resolvability is a focus, it is likely that group structures will
change (or need to be changed) in order to improve resolvability. This was the main justification
for the restructuring announced by Credit Suisse AG in 2H13. Initiatives like ring-fencing of
activities (whether core retail services or trading operations) or multiple point of entry resolution
could result in the risk profile (and thus ratings) of legal entities within banking groups being
more differentiated than has generally been the case.
7
Sovereign Support for Banks
March 2014
See http://www.fdic.gov/about/srac/2012/gsifi.pdf
5
Banks
Annex 1: Europe (including CIS and Georgia)
European Union Member Countries
Europe
Support Path 3
Austria
Belgium
Bulgaria
Denmark
Finland
France
Germany
Hungary
Ireland
Italy
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovenia
Spain
Switzerland
United Kingdom
Support Path 2
Sweden
Norway
Support Path 1
Azerbaijan
Belarus
Georgia
Kazakhstan
Russia
Turkey
Ukraine
Uzbekistan
No Path
Cyprus
Greece
With the exception of Cyprus and Greece where bank SRs/SRFs are already 5/’No Floor’ and
Sweden (path 2), almost all EU countries where Fitch assigns SRFs to banks are on path 3, as
are most banks whose SRs/SRFs are not already 5/’NF’. As the only EU country on path 2, a
separate sub-section on Sweden has been included below.
A number of individual banks in path 3 countries are either on path 1 or 2. These are generally
banks that are already under orderly wind-down or have public sector ownership/policy roles.
Their cases are covered in more detail in two Special Reports to be published shortly entitled
Rating Paths for EU State-sponsored Banks and Various Support Rating Paths for German
Banks.
BRRD Provides Broad Suite of Resolution Powers and Tools
Member countries’ current legislative frameworks for bank resolution demonstrate a wide
degree of development or sophistication. For example, the bail-in tool is already available in the
UK and Cyprus and resolution legislation already incorporates other resolution tools (eg, bridge
bank tool) in countries like Spain, the Netherlands, Greece and Germany. On the other hand,
resolution legislation is still quite rudimentary in Italy and some central and eastern European
(CEE) member countries. Events in Cyprus a year ago and Spain in 2012 acted as a reminder
that new resolution legislation can be drafted quickly, if desired or required.
8
With agreement at the European Council and European Parliament levels on the proposed
BRRD in December 2013 and a Parliament vote scheduled for April 2014, member countries
will have to update and harmonise legislation and supervisory or resolution authority powers in
line with most of the directive’s requirements over the course of 2014. The bulk of its provisions
become effective on 1 January 2015 (1 January 2016 for the bail-in tool). These are deadlines,
so early adoption by member countries is permitted.
The resolution tools and powers required under the BRRD are comprehensive and very much
in line with the tools and powers envisaged in the FSB’s Key Attributes of Effective Resolution
9
Regimes for Financial Institutions . The core resolution tools for banks that meet the conditions
for resolution are the sale of business, bridge institution, asset separation and bail-in tools,
which can be applied singly or in combination.
In addition, financial stabilisation tools can be used on certain institutions that meet the
conditions for resolution in a systemic crisis, if other resolution tools were deemed likely to
cause financial instability. These tools are the ‘public equity support tool’ and the ‘temporary
public ownership’ tool. They would be subject to European Commission state aid approval and
bail in of at least 8% of own funds and other eligible liabilities. Alternative sources of finance
(presumably direct government funds), other than standard resolution funds can be sought in
such scenarios and there does not appear to be an upper limit on them.
Fitch believes the bail-in tool to be the most effective of the resolution tools envisaged in BRRD,
either on its own or in combination with other tools, because it is burdened with fewer practical
hurdles than other resolution tools.
BRRD Helps To Address Practical Impediments to Resolution
Practical impediments to effective resolution still exist in EU banking groups to varying degrees.
These are usually to do with group structure complexity but also include risks associated with
early termination of financial contracts of a bank in resolution, for example. In addition to a
Sovereign Support for Banks
March 2014
8
See
http://register.consilium.europa.eu/doc/srv?l=EN&t=PDF&gc=true&sc=false&f=ST%2017958%2020
13%20INIT
9
See https://www.financialstabilityboard.org/publications/r_111104cc.pdf
6
Banks
comprehensive suite of resolution tools, the BRRD is designed to enhance authorities’ powers
to overcome practical hurdles needed for effective bank resolution. For example, it empowers
authorities to require banking groups to make structural changes to improve resolvability and to
suspend termination rights temporarily.
EU countries where practical impediments to effective resolution are greater (ie, countries with
larger/more complicated banking groups or hosting cross border banks) tend to be further
advanced in addressing practical impediments to effective resolution under existing supervisory
frameworks (eg, resolution planning, living wills, resolution colleges). Countries where less
progress has been made on the practical aspects of effective bank resolution tend to have
simpler banks, meaning the practical impediments to effective resolution are in any case lower.
For banking groups that extend cross border within the euro area, the cohesion to the
supervisory and resolution process that ought to be offered by banking union should reduce or
eliminate some of the practical impediments to effective resolution (eg, the need to co-operate
with other resolution authorities). For banking groups operating within the wider EU, BRRD sets
out ground rules for intra group financial support and creates a commonly agreed framework
for member countries to address practical impediments to effective resolution.
For banking groups that extend beyond the EU, the practical aspects of resolution co-ordination
between resolution authorities will be more challenging for resolution authorities because of
national interests and nuances in resolution approaches. However, key countries (eg, the US,
the UK and Switzerland) are increasingly working together and the FSB is working to
harmonise principles among member countries. Such banking groups are often being required
to have increasingly self-standing operating subsidiaries subject to local regulatory capital
requirements (eg, under the new US rules for foreign banks under section 165 of the DoddFrank Act), which reduces the complexity of the matter.
Within BRRD, Fitch believes MREL, while not an absolute necessity for a bank to be resolved,
will be an important step in improving bank resolvability, reducing risk for counterparties and
depositors and thus reducing contagion risks. Banks’ capital and debt structures will need to be
re-shaped to meet these requirements, once communicated by resolution authorities.
Dependent on the amounts and mix (ie, junior versus senior), MREL and other ‘loss absorption
capacity’ requirements could have ratings implications over time (see also Junior Debt Volume).
The European Banking Authority has been tasked with developing assessment criteria for
setting MREL and further legislation may be considered to ensure a harmonised application.
BRRD is relatively silent on SPE versus ‘multiple point of entry’ (MPE) resolution strategies,
leaving this to resolution authorities to decide. Within the EU, the UK is the country that has
most clearly embraced the SPE concept. More widespread adoption may well occur once
banking union is up and running. Lack of clarity over resolution strategy or its implementation
does not make a bank unresolvable per se, but a clear and executable strategy would reduce
resolution uncertainty and contagion risks.
Political Flexibility To Bail Out Reduced Under BRRD
Sovereign support for banks is still possible under BRRD and standard ‘lender of last resort’
functions by central banks will, of course, remain possible. Flexibility has been reduced, though.
Solvent Banks
For such banks that do not meet the conditions for resolution, Article 27.2.d states that, in order
to remedy a serious disturbance and preserve financial stability, extraordinary state support in
the form of precautionary and temporary guarantees are permitted. Capital injections are also
permitted, but rather more begrudgingly (eg, the European Commission has to review the need
for this carve-out by 2016).
Sovereign Support for Banks
March 2014
7
Banks
The final compromise text seems to indicate that capital injections shall be limited to
addressing capital shortfalls established in stress tests, asset quality reviews or their equivalent
conducted by the ECB, EBA or national authorities. Although the provisions of BRRD do not
need to be implemented until 2015/2016, this would appear to be a reference to the plethora of
assessments and stress tests facing EU banks in 2014. Shortfalls not filled in 4Q14 are likely to
need to be filled in 2015.
Failed Banks
For such banks (eg, insolvent or a fatal breach of regulatory requirements), there appear to be
two ways that support might still be able to be provided to senior creditors.
i) Under Article 27 (Conditions for Resolution). This is because one of the three conditions for
resolution is that it must be ‘in the public interest’, a concept addressed in Article 26 (Resolution
Objectives), in which considerations such as avoidance of ‘significant adverse effects on
financial stability’, ‘preventing contagion’ and ‘minimising reliance on extraordinary financial
support’ are cited. These are subjective concepts, open to latitude of interpretation by
resolution authorities.
ii) Under the 8% rule. There is an ability to use resolution funds to recapitalise a bank as long
as 8% of liabilities and own funds (or 20% of risk weighted assets (RWAs) where applicable)
measured at the point of resolution decision are bailed in. This represents a high hurdle, though,
aimed clearly at severely curtailing political flexibility to bail out senior creditors of banks that
meet conditions for resolution.
Extra Dimension In Banking Union Countries
In the euro area and for any other countries that sign up to banking union, the move towards
creation of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism
(SRM) should reduce political impediments to resolution. For example, supervision and
licensing decisions will reside with the ECB, rather than with national supervisory/competent
authorities.
The European Council and European Parliament struggled to reach agreement on the
proposed SRM regulation, in particular the extent of national influence over resolution decisions
and resolution financing arrangements. The compromise position reached in mid-March may
be imperfect and of course untested, but the overall intent is broadly in line with frequently
stated policy goals, Resolution decisions will involve multiple parties (eg, the ECB, the Single
Resolution Board, the European Commission and the European Council) but, overall, the SRM
will result in a dilution of national influence over resolution decisions compared to the current
situation.
Sweden, the EU Outlier
Sweden has been the leading advocate of flexibility, partly due to its experience of cleaning up
banks in its 1990s crisis, but also because it has a concentrated, largely homogenous banking
sector that relies on attracting international and foreign currency funding. The banking sector’s
wholesale funding reliance, with a material interconnectedness between the banks, means
faltering investor confidence could spill over to the whole sector. For this reason, prudential
requirements for its banks are very high (and the banks are among the highest rated by Fitch
on its Viability Rating scale).
In maintaining control over supervision and resolution decisions, Sweden has more flexibility to
interpret and apply BRRD than banking union member countries. While Sweden is likely to
retain a high propensity to support its major banks to safeguard financial stability in light of the
concentrated structure, Sweden is bound by EU state aid rules, meaning it does not have full
control over support decisions. The European Commission can refuse to approve a bail out if
restructuring plans do not make a clear case for a return to viability. Overall, Fitch has
Sovereign Support for Banks
March 2014
8
Banks
classified Sweden as a path 2 country reflecting Fitch’s expectation that Sweden will retain a
high propensity to support its major banks, consistent with a ‘2’ Support Rating, but that support
decisions are now more constrained.
Norway
Like Sweden, Norway is on path 2. A bank resolution framework has not yet taken centre stage
in Norway, although Fitch expects drafting and implementation to progress over the next few
years, at least to ensure the banking authorities have a variety of tools to deal with problems in
the banking sector. As part of the European Economic Area (EEA), Norway is likely to be
bound to implement some European directives, although Fitch expects that it will aim to do so
in the most flexible format possible. It is also likely that Norwegian banking authorities will take
into consideration what is implemented in other Nordic countries, particularly in Sweden, but
again providing the most flexibility possible to decide on a process of resolution.
Fitch believes support for Norwegian banks will likely reduce over time, although that ultimately
support will still be highly probable for the country’s largest banks. This is partly driven by
Norway’s strong ability to support its banks as reflected in its rating, but also the largely
domestic focus of the banking sector. The Norwegian authorities have proposed, but not
confirmed, a list of eight banks to be defined as domestic systemically important financial
institutions (D-SIFIs). Fitch believes that while the SRF will likely reduce for the largest banks,
the justification for maintaining the wide notching to the other domestic SIFIs has reduced, as
outlined in Annex 6.
Switzerland
Following the government support extended to UBS AG in 2008 and 2009, the Swiss
authorities accelerated the implementation of recovery and resolution legislation and the Swiss
legal framework is now one of the most advanced. Consequently, Fitch has decided on path 3
for the Swiss banks, which will ultimately result in a SRF of ‘No Floor’ for the country’s
systemically important banks.
In practice, this decision will only affect the SRFs of Switzerland’s two largest banks, Credit
Suisse and UBS, since in the case of the other rated banks Fitch either already disregards the
possibility of sovereign support (eg, private banks, which already have a SRF of ‘No Floor’) or
bases its ratings on explicit guarantees (ie, Zuercher Kantonalbank). The IDRs of Credit Suisse
and UBS will not be affected by any downward revision of their SRFs because they are driven
by their VRs.
Many aspects of Switzerland’s recovery and resolution framework are contained in its Banks
and Savings Banks Act and the Banks and Savings Ordinance with separate ordinances for
capital adequacy, liquidity and bank insolvency. The Swiss banking regulator, FINMA, has farreaching powers as the country’s resolution authority, including the bail in of senior debt.
FINMA’s preferred approach to bank resolution is bail in of debt under a SPE approach.
Aspects of the recovery and resolution legislation that still need to be finalised include the tax
treatment of bail-in debt issued out of Swiss entities, the resolution framework for holding
companies and changes to UBS’s and Credit Suisse’s legal entity structures. As the two big
banking groups operate globally, international cooperation between the national authorities will
be important.
CIS Countries and Georgia
Countries of the Commonwealth of Independent States (CIS) – specifically Russia, Ukraine,
Kazakhstan, Belarus, Azerbaijan and Uzbekistan - and Georgia have been assessed as path 1
countries. This reflects Fitch’s view that amendments to bank resolution legislation, which would
provide for statutory bail in of senior creditors, are, for the most part, unlikely in these countries in
the near to medium term, and support philosophies are unlikely to change significantly.
Sovereign Support for Banks
March 2014
9
Banks
In Russia (BBB/Negative), the relatively high SRFs of Sberbank (BBB/Negative), Russian
Agricultural Bank (BBB-/Negative) and Gazprombank (BBB-/Negative) reflect the authorities’
track record of support for these banks to date, their high systemic importance, government
ownership/connections and (in the case of Russian Agricultural Bank) the bank’s policy role.
Russian bank resolution legislation is currently being reviewed, in particular with a view to
clarification of the role of the Deposit Insurance Agency in resolving failed institutions. However,
it appears that statutory bail in of senior creditors is currently not being considered as part of
that review - notwithstanding Russia being a G20 and FSB member country - and national
champions are still very likely to benefit from support in case of need, in Fitch’s view.
In Kazakhstan (BBB+/Stable), the SRFs of even systemically important banks are already very
low relative to the sovereign rating. Halyk (BB/Stable), the country’s largest retail bank, has a
SRF of ‘B’, and Kazkommertsbank (B/Stable) has a SRF of ‘B-‘. These low SRFs reflect the
authorities’ recent track record of bailing in senior creditors of other systemically important
banks. The SRFs have not been lowered to ‘No Floor’ because of the funding and (moderate)
capital support which these two banks received during the crisis, and Fitch’s view that
moderate support could be provided again in case of need. Although de jure statutory bail in of
senior creditors is not provided for in Kazakh legislation, de facto this principle has been
applied in five bank resolutions during the last five years as wholesale creditors have been
forced to accept losses while depositors have been kept whole.
In Ukraine (CCC), the SRFs of state-owned systemically important banks Ukreximbank and
Oschadbank have always been equalised with the sovereign, as these banks have consistently
benefited from support under different governments over an extended period of time. The
National Bank has recently floated the idea of bailing in senior creditors (in particular, uninsured
depositors) of failed banks. In the near-term at least, Fitch expects that this provision would be
used only in respect of privately owned banks (whose SRFs are already ‘No Floor’), with
support propensity for Ukreximbank and Oschadbank remaining robust.
Turkey
Turkey has been assessed as a path 1 country. The country experienced a deep financial crisis
in 2001, during which state support for the banking sector was widespread. Many regulatory
changes were made and a new banking law was passed. The government recognises the
strategic importance of the banking sector and the need to ensure it remains strong and safe.
State ownership of the sector is high – the state controls three of the country’s seven
systemically important banks (SIBs) – and the correlation between bank and sovereign risk is
high.
The public associates state-owned banks closely with the authorities, increasing confidence
that they would be supported in case of need. Preserving confidence in Turkey’s banking
sector is a priority for government, not only because domestic banks are natural purchasers of
government debt, but also because the country depends on a significant inflow of short-term
foreign currency investment to finance its large current account deficit, part of which is attracted
by the banks. The fact that SIBs tend to have broadly similar business models increases the
incentive to support as there is a risk that failure of one SIB would suggest widespread flaws in
the business models adopted by all SIBs, potentially making confidence more fragile.
However, Turkey is a member of both the G20 and the FSB. The Turkish regulators are making
efforts to comply with FSB requirements. Guidelines for Basel III compliant capital instruments
were issued in 3Q13 but little has been said regarding bailing in of senior creditors. On the
whole, the authorities are keen to ensure that future failed banks can be resolved without
access to public sector support, and amendments to the existing banking law are being
contemplated. However, in Turkey there is no statutory bail-in legislation and progress on
implementing this appears to be a long way off.
Sovereign Support for Banks
March 2014
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Banks
Annex 2: North America
North America
Support Path 3
United States
Support Path 2
Canada
Bermuda
Support Path 1
None
Within North America (US, Canada, and Bermuda), the US and Canada are both prominent
members of the G20 and FSB, and thus have signed on to the FSB Effective Resolution
framework and each has comprehensive resolution legislation in force. Bermuda has proposed
bank resolution legislation. However, this has not become law. The US is designated path 3,
while Canada and Bermuda are both classified as path 2 countries.
United States
The US is a path 3 country given its comprehensive legislation (Dodd-Frank Wall Street Reform
and Consumer Protection Act), which was enacted in July 2010, and expanded the Federal
Deposit Insurance Corporations’ (FDIC) powers to resolve large and complex financial
institutions, generally referred to as the Orderly Liquidation Authority (OLA). The Act clearly
prohibits resolution authorities from direct capital infusions into failing or non-viable banks and
requires that creditors take losses. Although broader systemic liquidity support is permissible,
Fitch does not consider this to be support in the sense contemplated by Fitch’s bank-specific
support rating framework, as any increased liquidity support can only be provided to the system
as a whole, and not to any individual bank.
Most US banks are organised under a holding company structure, which facilitates and
centralises management, support, and financial operations across group subsidiaries. In order
to implement its OLA authority, and in light of holding company structure, the FDIC has
formulated its SPE strategy. Under SPE, the FDIC would be appointed receiver only of the toptier US holding company and material subsidiaries would remain open and operating. The
FDIC could then create a bridge financial institution and apportion losses to shareholders and
creditors in the failed entity in accordance with priority of claims. In this way, the SPE strategy
complements the FDIC’s historical powers to resolve a failed bank by allowing it to address the
holding company as well.
Fitch’s assessment of continuing support for US global SIFIs (G-SIFIs) has to some extent
relied upon the feasibility of OLA implementation rather than its enactment into law. Hurdles
that remain include the resolution of how cross-border derivative acceleration/termination
provisions are handled and that there is sufficient contingent capital at the holding company to
recapitalize without requiring government assistance. Fitch expects that the SPE strategy and
regulatory action to ensure sufficient contingent capital will be finalised in the near term.
The US has eight of the 29 G-SIFI institutions, which are subject to additional capital
requirements. To date, the US has not formally designated any domestic systemically important
banks.
Fitch’s view of the likelihood of reduced sovereign financial support excludes government
sponsored enterprises (GSEs) such as the Farm Credit Banks, Federal Home Loan Banks,
Fannie Mae, Freddie Mac, and National Credit Union Administration, as support for these
entities is unaffected by banking resolution.
Canada
Canada is one of only a handful of countries on path 2, reflecting the view that while support for
its banks is still probable, it will likely weaken. Fitch’s view of path 2 recognizes the flexibility
afforded to Canadian banking authorities under current legislation in resolving a failed bank.
Under law, Canadian banking authorities have wide latitude to resolve a troubled bank. For
example, authorities include re-capitalizing an institution, creating a bridge bank, or imposing
losses on creditors. Given the wide array of powers, Fitch believes support is still possible, but
the probability will likely decrease.
Sovereign Support for Banks
March 2014
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Banks
Canada was relatively unscathed by the global financial crisis owing to the fact that its banks
had relatively little exposure to problematic assets and are mainly core deposit funded.
Moreover, Canadian authorities have actively incorporated lessons from the global financial
crisis. While no Canadian bank has been designated a G-SIFI, the seven largest banks have
been designated D-SIFIs with a 1.0% capital buffer.
Bermuda
Bermuda is also designated as path 2. While Bermuda has not passed specific bank resolution
legislation, it has proposed legislation modelled on the UK’s Special Resolution Regime (SRR).
Fitch anticipates that banking resolution legislation will ultimately come in to force. Passage of
any banking resolution legislation would not be in and of itself a trigger in reducing support. In
the context of Bermuda, only one entity, Bank of N.T. Butterfield (BTNB), has a SR of ‘1’ and
SRF of ‘A-’. Moreover, BTNB continues to benefit from the Bermuda government’s guarantee
of its preferred stock, which remains outstanding.
Sovereign Support for Banks
March 2014
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Banks
Annex 3: Middle East and Africa
Middle East & Africa
Support Path 3
None
Support Path 2
South Africa
Support Path 1
Saudi Arabia
UAE
Kuwait
Qatar
Bahrain
Oman
Israel
Jordan
Lebanon
Egypt
Morocco
Nigeria
Tunisia
No Path
Togo
GCC/Middle East
Countries in the Gulf Cooperation Council (GCC)/Middle East have all been classified as being
on path 1. There is no bank-specific resolution legislation in place in any country and Fitch is
not expecting any move afoot to implement sophisticated bank resolution frameworks along
FSB principles in the foreseeable future. As such, bank resolution will continue to be handled
under standard insolvency laws. This is true even in Saudi Arabia, a FSB/G20 member country.
GCC governments maintain very substantial deposits with the banks and, at the same time,
often hold significant stakes in them, making the banking sectors highly politicised. Letting
some banks default would in most cases be more onerous for the governments than to provide
support to the banks. In addition, there is no personal taxation in the region, and there is
therefore no concern about spending taxpayers’ money on bail outs. Moreover, the decisionmaking usually resides with the ruling families, who are expected to protect the interests of the
population (ie nationals) in exchange for their limited participation in government, have a vested
interest in maintaining the status quo and have ample resources to do so. In Bahrain, the
willingness to support is reinforced by the strong desire to avoid further unrest and maintain the
country’s reputation as an international financial centre.
Other Middle East countries (Jordan, Egypt and Lebanon) have lower resources to support
their banking systems than GCC countries. While Jordan’s banking sector is large relative to
GDP, it is closely managed by the central bank and, in our opinion, the authorities’ willingness
to support all domestic banks will not weaken in order to avoid instability. In Egypt, the
domestic banking sector is relatively large and Fitch’s opinion is that the authorities’ willingness
to support the domestic banks will remain unchanged as the government is highly dependent
on the banks which are substantial investors in Egyptian sovereign local currency bonds and Tbills needed to finance the budget deficit. While Lebanon is politically divided and is suffering
from the situation in Syria, the banking system is very large relative to GDP and remains one of
the country’s strengths. It is Fitch’s opinion that the authorities’ willingness to support the
domestic banks will not weaken in order to avoid instability.
South Africa
South Africa has been classified as a path 2 country, but a downward revision of SRFs will not
affect any bank’s IDRs because they are all driven by their VRs.
South Africa’s banking system is relatively sophisticated. The banks are fine-tuning their
recovery plans in 2014 and a proposal for resolution legislation has been submitted for public
consultation which is likely to be implemented by end-2015. South Africa is a FSB and G20
member country.
The implementation of resolution legislation will give the South African authorities the tools to
enact resolution and signify a reduced propensity to support. However, Fitch considers that
South Africa will still have more flexibility to support banks than many countries in the EU and
euro area for example and that South Africa’s path 2 may therefore be an end state rather than
an interim step to path 3.
This view is supported by the low level of politicisation of South African banks due in part to
their relative health throughout the crisis having not needed support. In addition, the Fitch-rated
banks comprise the five major banks which could all be considered to be D-SIFIs which could
mean that the authorities could provide support in a more traditional manner if it made
economic sense to do so. The major banks are all private enterprises with no direct
government ownership or significant influence.
Sovereign Support for Banks
March 2014
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Banks
While the argument could be made that the five major South African banks are all important
enough to support, there are no significant impediments to a resolution regime. The banks are
mostly domestically focused with a small proportion of cross border lending, the South African
legal system is strong and creditor friendly. The regulator has been adamant that South Africa
would not be an exception to any of Basel III or CRD IV requirements. This is likely to be
equally applicable to recovery and resolution planning.
Other African Countries
Fitch assigns SRFs above ‘No Floor’ in several other countries in Africa. All of these countries
and banks domiciled therein are on path 1, reflecting unsophisticated bank resolution
frameworks and/or a supportive approach to bank senior creditors that is unlikely to change
over the medium-term.
Sovereign Support for Banks
March 2014
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Banks
Annex 4: Asia Pacific (APAC)
APAC Remains Supportive
Path 1 Dominates
Asia Pacific
Support Path 3
Hong Kong
Support Path 2
None
Support Path 1
Australia
China
India
Indonesia
Japan
Macao
Malaysia
Mongolia
Philippines
Singapore
South Korea
Sri Lanka
Taiwan
Thailand
Vietnam
No Path
Notwithstanding several APAC countries being members of the G20/FSB, and Japan and
China being home to five G-SIFIs, there is little urgency to address legislative and supervisory
shortcomings versus the FSB Effective Resolution framework for resolving failed banks.
Furthermore, for the 17 financial systems covered by Fitch in APAC most have shown little
evidence that the authorities will become less supportive for their large systemic financial
institutions. There are several key reasons for this.
1.
Frameworks for a number of markets were updated after the Asian crisis that would for
example allow for asset and liability transfers, etc.
2.
Some countries remain either highly concentrated (Singapore, Australia) or dependent
upon foreign funding (Australia, South Korea), and the authorities do not wish to jeopardise
access to such funding.
3.
Since the global financial crisis unfolded, no country in APAC has experienced a banking
crisis.
4.
The authorities generally remain highly supportive for systemically important financial
institutions.
New Zealand
Fitch expects most G20/FSB countries to bring legislation and procedures into line with
international and FSB developments over time, possibly becoming less supportive over the
medium-term, but the timeline is currently less clear. Advanced G20 economies in this category
would include Singapore, South Korea and Australia. However, the concentrated nature of
banking systems and the potential for contagion risk in particularly Australia and Singapore
means Fitch views authorities as currently highly supportive and could remain so even if
legislation was broadened.
Japan already had a formal resolution framework for banks in place, but the authorities rarely
contemplate imposing losses on senior (or subordinated) creditors of systemically important
institutions. Japan’s Financial Services Agency recently extended its framework to capture
financial holding companies and other non-bank financial institutions in addition to deposittakers.
For Asia’s G20 emerging countries such as China, India and Indonesia, moves to establish a
fully functioning resolution framework that incorporates bail-in language is likely to be a longerterm prospect. At the very least, there has been little momentum in drafting such a framework.
The role played by the authorities in terms of either having a centrally controlled economy
and/or significant direct ownership of the banking system (China and India) means the
likelihood of support diminishing appears an unlikely prospect over the medium term. For
Indonesia and other larger non-G20 emerging markets such as Malaysia and Thailand the
ability to impose losses on creditors already exists through an asset liability transfer, but we
expected the authorities in these markets to remain supportive of systemic banks particularly
given these systems are largely deposited funded.
Hong Kong The Exception
In APAC there are two markets, Hong Kong and New Zealand that are either moving towards
or have a resolution framework that would allow for the bail in of senior creditors. A common
feature of both these markets is that their large banks are owned by foreign banking groups
necessitating a flexible framework with wide ranging powers (including bail in) that would
accommodate actions taken by home regulators.
Hong Kong has a consultation paper out for market feedback on a framework to be finalised by
2015 that would allow for the bail in of senior creditors. This clear intention means Hong Kong
Sovereign Support for Banks
March 2014
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Banks
is on path 3. Downward revisions of SRs and SRFs would not affect any bank’s IDR, since all
Hong Kong rated banks are driven by their VR. That said, subsidiaries of foreign-owned banks
could retain a SR higher than ‘5’, if Fitch is of the view that they would benefit from institutional
support by their foreign parents. This could provide uplift to a bank’s IDR even if its VR was
facing downward pressure. In the case of Bank of China (Hong Kong) Ltd (A/Stable) and The
Hongkong and Shanghai Banking Corporation Limited (AA-/Stable), their SR is expected to
remain at ‘1’ based on the current IDRs of their foreign parents. The SR of Shanghai
Commercial Bank Ltd (A-/Stable) would also need to consider whether or not in future the bank
could rely upon support from its parent.
As international financial centres Hong Kong, along with Singapore, would in particular be
expected to follow relatively similar paths as they implement the latest international regulatory
best practise. However, the pace at which they implement the changes reflects the differences
between the two systems as Hong Kong’s large banks are foreign owned with some home
regulators (UK) updating their resolution frameworks. For Singapore, the three main banks are
domestically owned and as a result there is less urgency with the authorities monitoring
international developments.
For New Zealand, a formal resolution regime already exists – the Open Bank Resolution
Scheme (OBR) – which allows authorities to bail in senior creditors to make up capital shortfalls
where a deposit taking institution has failed. As this is already factored into Fitch’s support
assumption New Zealand is on ‘no path’.
Sovereign Support for Banks
March 2014
16
Banks
Annex 5: Latin America
No Sense of Urgency
Latin America
Support Path 3
None
Support Path 2
None
Support Path 1
Brazil
Colombia
Costa Rica
Chile
Dominican
Republic
Guatemala
Jamaica
Mexico
Panama
Peru
No Path
Argentina
Ecuador
El Salvador
Venezuela
Regulators and politicians in the region have not manifested a real sense of urgency towards
changes on the resolution regimes in Latin America in part due the resilience of the region in
the last financial crisis. Moreover, the overall sentiment towards bank bail outs have not
followed the negative trends seems in many countries of the developed world.
In Latin America, Fitch has assigned SRFs to state-owned Dominican, Panamanian and
Chilean banks, as well as SIBs in Brazil, Chile, Colombia, Costa Rica, Guatemala, Jamaica,
Mexico and Peru. As Fitch believes that the authorities have the willingness and capacity to
provide support it should be required and as of today are not inclined to weaken their attitude
toward bank support, as such there will be no immediate impact on ratings.
In the case of other Latin American banks without a SRF or a SRF of ‘No Floor’, sovereign
support is not applicable to these banks’ potential rating paths. This would include all banks in
Argentina, Ecuador, El Salvador and Venezuela, as well as D-SIFIs in the Dominican Republic
and Panama, among others.
Although Brazil and Mexico are among the G20 countries involved in the FSB’s effective
resolution agenda, bank resolution is less of a priority relative the EU and US. Support
assumptions are most likely to weaken over time in these countries given the trends seen in
other FSB members, however, Fitch does not expect any material changes over the typical
ratings horizon of up to two years. Currently, there is no agenda to weaken sovereign support
of senior creditors in either country. As 2014 is an election year in Brazil, the political will to
implement financial sector reforms is limited, and Fitch believes that the earliest the central
bank is likely to submit any draft proposals with respect to bank resolution is late 2015. In
Mexico, Fitch expects discussions to improve the bank resolution regime to begin in 2014,
although as of today there are no clear signs of possible proposals in this regard; while the
regulatory agenda is pretty busy due the ambitious structural reforms program started by the
new president late last year.
In other Latin American countries, discussion has been even more limited with respect to bank
resolution or potential restrictions of sovereign support to bail out non-viable banks. These
countries have yet to implement BIS 3 guidelines, while the authorities’ public statements
regarding the improvement of bank resolution regimes have been limited to non-existent.
Historically, sovereign support in Latin America towards SIBs and state-owned banks has been
significant. Material legislative and political impediments to effective bank resolution are likely
to continue over the medium-term, leading Fitch to believe that implicit support will remain
effectively unchanged. Furthermore, in most countries the costs of previous bail outs have
already been absorbed. With the exception of Chile and Panama, financial intermediation
remains relatively low, underpinning the sovereigns’ ability to support SIBs and state-owned
banks if needed in most of the region’s countries.
Regulatory frameworks in the region have been more focused on diminishing bank failure risk
with the use of more stringent capital and liquidity requirements, improved transparency of
information disclosure and related party lending limits. While regulatory regimes across Latin
America have incorporated international best practices based on BIS II and BIS III guidelines,
the level of advances and adherence varies from country to country.
Sovereign Support for Banks
March 2014
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Banks
Annex 6: Summary of Country and Bank Level Path Outcomes
Overview
For path 2 and 3 countries, the tables below summarise base case country and bank SR/SRF
rating paths by region. It is possible that information will come to light that would cause us to
change our assessment, but the paths and future SRs/SRFs outlined below represent our base
cases at this point.
Long-Term IDRs of banks that are not support-driven (see column 2 of Figure 5) will not be
affected by downward revision of SRFs. Where banks’ LT IDRs are support-driven, downward
revisions of SRFs are likely to cause downgrades of Long-Term IDRs, in most cases to the
level of banks’ VRs at the time, unless mitigating factors arise in the meantime. Mitigating
factors could include upgrades of VRs to the level of current SRFs, the existence of large
buffers of junior debt or corporate actions.
All countries and banks in Latin America where Fitch assigns SRFs above ‘No Floor’ are on
path 1 indicating no near-term downward revision of SRs or SRFs is likely for declining
propensity reasons. Consequently, no table has been produced.
Banks whose SRs/SRFs are already ‘5/No Floor’ have been excluded from the tables as have
banks covered in two Special Reports entitled Rating Paths for EU State-sponsored Banks and
Various Support Rating Paths for German Banks, which will be published soon by Fitch.
Sovereign Support for Banks
March 2014
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Banks
Figure 5
European Path 2 & Path 3 Countries
Sov. Support- Base Case
driven IDR? Path
Current LT
IDR/Outlook
Current
SR/SRF
Current VR
Base Case Future
SR/SRF
Austria (3)
Erste Group Bank AG
Raiffeisen Bank International AG
UniCredit Bank Austria AG
Yes
Yes
Yes
Path 3
Path 3
Path 3
A/Neg
A/Neg
A/Neg
1/A
1/A
1/A
abbb
bbb+
5/No floor
5/No floor
5/No floor
Belgium (3)
Belfius Bank SA/NV
Euroclear Bank
KBC Bank
KBC Group
Yes
No
No
No
Path 3
Path 2/3
Path 3
Path 3
A-/Neg
AA+/Sta
A-/Sta
A-/Sta
1/A1/A1/A1/A-
bb+
aa+
a-
5/No floor
As low as 5/No floor
5/No floor
5/No floor
Bulgaria (3)
First Investment Bank AD
Yes
Path 3
BB-/Neg
3/BB-
b-
5/No floor
Denmark (3)
Danske Bank
Nordea Bank Danmark
Nykredit Realkredit A/S
Realkredit Danmark A/S
No
No
No
No
Path 3
Path 3
Path 3
Path 3
A/Sta
AA-/Sta
A/Sta
A/Sta
1/A1/A1/A1/A-
a
aaa
a
5/No floor
5/No floor
5/No floor
5/No floor
Finland (3)
Nordea Bank Finland Plc
OP-Pohjola Group
Pohjola Bank
No
No
No
Path 3
Path 3
Path 3
AA-/Sta
A+/Sta
A+/Sta
1/A
1/A
1/A
aaa+
a+
5/No floor
5/No floor
5/No floor
France (3)
BNP Paribas
Groupe BPCE
- BPCE S.A.
No
No
No
Path 3
Path 3
Path 3
A+/Sta
A/Sta
A/Sta
1/A
1/A
1/A
5/No floor
5/No floor
5/No floor
CM11-CIC
- Banque Federative du Credit Mutuel (BFCM)
No
No
Path 3
Path 3
A+/Sta
A+/Sta
1/A
1/A
Credit Agricole
- Credit Agricole S.A.
No
No
Path 3
Path 3
A/Sta
A/Sta
1/A
1/A
Societe Generale (SG)
Yes
Path 3
A/Neg
1/A
a+
a
No VR; IDR in line
with Groupe BPCE
a+
No VR; IDR in line
with CM11-CIC
a
No VR; IDR in line
with Credit Agricole
a-
Yes
Yes
Yes
Yes
No
No
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
A-/Neg
A+/Neg
BBB-/RWP
A+/Neg
A+/Sta
A+/Sta
1/A1/A+
2/BBB1/A+
1/A+
1/A+
5/No floor
5/No floor
See footnote 1
5/No floor
5/No floor
5/No floor
No
Yes
Path 3
Path 3
A+/Sta
A+/Neg
1/A+
1/A+
bbb
bbb
bb
a
a+
No VR; IDR in line
with group
a+
a-
Hungary (3)
OTP Bank
-
Path 3
-
3/ -
-
5/ -
Ireland (3)
Allied Irish Banks, plc
Bank of Ireland
Yes
Yes
Path 3
Path 3
BBB/Neg
BBB/Neg
2/BBB
2/BBB
bb+
5/No floor
5/No floor
Yes
Yes
No
Yes
No
Path 3
Path 3
Path 3
Path 3
Path 3
BB/Neg
BBB/Neg
BB+/Neg
BB+/Neg
BBB/Neg
3/BB
2/BBB
3/BB+
3/BB+
3/BB
b-/RWN
ccc
bb+
bb-/RWN
bbb
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
No
No
Yes
No
No
No
No
No
No
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
BB+/Neg
BBB+/Neg
BBB/Neg
BBB+/Neg
BB+/Neg
BBB/Neg
BBB+/Neg
BBB+/Neg
BBB+/Neg
3/BB
4/B+
2/BBB
3/BB
3/BB
2/BBB
2/BBB
2/BBB
2/BBB
bb+
bbb+
bbbbbb+
bb+
bbb
bbb+
bbb+
bbb+
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
Germany (3)
Aareal Bank AG
Commerzbank AG
COREALCREDIT BANK AG (1)
Deutsche Bank AG
Genossenschaftliche FinanzGruppe
- DZ Bank AG Deutsche ZentralGenossenschaftsbank
Sparkassen-Finanzgruppe (Sparkassen)
UniCredit Bank AG
Italy (3)
Banca Carige
Banca Monte dei Paschi di Siena SpA
Banca Popolare dell'Emilia Romagna
Banca Popolare di Milano
Banca Popolare di Sondrio-Societa' Cooperativa
per Azioni
Banca Popolare di Vicenza
Banco di Desio e della Brianza
Banco Popolare
Credito Emiliano S.p.A.
Credito Valtellinese
Iccrea Holding SpA
Intesa Sanpaolo S.p.A.
UniCredit S.p.A.
Unione di Banche Italiane Scpa - UBI Banca
Sovereign Support for Banks
March 2014
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
19
Banks
Figure 5
European Path 2 & Path 3 Countries
Sov. Support- Base Case
driven IDR? Path
Current LT
IDR/Outlook
Current
SR/SRF
Current VR
Base Case Future
SR/SRF
Luxembourg (3)
Banque Internationale a Luxembourg
Clearstream Banking, Luxembourg
Yes
No
Path 3
Path 2/3
A-/Neg
AA/Sta
1/A1/A-
bbb+
aa
5/No floor
As low as 5/No floor
Malta (3)
Bank of Valletta
No
Path 3
BBB+/Sta
2/BBB-
bbb+
5/No floor
Yes
Yes
Yes
No
No
Path 3
Path 3
Path 3
Path 3
Path 3
A+/Neg
A+/Neg
A/Neg
AA-/Neg
AA-/Neg
1/A+
1/A+
1/A
1/A+
1/A+
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
Yes
Yes
Path 3
Path 3
BBB+/Neg
BBB+/Neg
2/BBB+
2/BBB+
aa
aaNo VR; IDR in line
with group
bbb-
Norway (2)
Nordea Bank Norge
SpareBank 1 Nord-Norge
SpareBank 1 SMN
SpareBank 1 SR-Bank
Sparebanken Vest
No
No
No
No
No
Path 2
Path 1
Path 1
Path 1
Path 1
AA-/Sta
A/Sta
A-/Sta
A-/Sta
A-/Sta
1/A
3/BB+
3/BB+
3/BB+
3/BB+
aaa
aaa-
2/BBB3/BB+
3/BB+
3/BB+
3/BB+
Poland (3)
Bank Millennium
Getin Noble Bank S.A.
Powszechna Kasa Oszczednosci Bank Polski
No
No
-
Path 3
Path 3
Path 3
BBB-/Sta
BB/Sta
-
3/BB
3/BB
2/-
bbbbb
-
5/No floor
5/No floor
5/-
Portugal (3)
Banco BPI
Banco Comercial Portugues, S.A.
Banif - Banco Internacional do Funchal, S.A.
Caixa Economica Montepio Geral
Yes
Yes
Yes
Yes
Path 3
Path 3
Path 3
Path 3
BB+/Neg
BB+/Neg
BB/Neg
BB/Neg
3/BB+
3/BB+
3/BB
3/BB
bbb
ccc
b+
5/No floor
5/No floor
5/No floor
5/No floor
Romania (3)
Banca Transilvania S.A.
No
Path 3
BB-/Sta
3/BB-
bb-
5/No floor
Slovenia (3)
Abanka Vipa d.d.
Nova Kreditna Banka Maribor
Nova Ljubljanska Banka d.d.
No
Yes
Yes
Path 3
Path 3
Path 3
B-/RWP
BB-/Neg
BB-/Neg
5/B3/BB3/BB-
b-/RWP
b-/RWP
b-/RWP
5/No floor
5/No floor
5/No floor
No
No
Yes
Yes
Yes
Yes
No
No
No
No
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
BBB+/Sta
BBB/Sta
BB/Neg
BBB-/Neg
BB+/Neg
BB+/Neg
BBB+/Sta
BBB/Neg
BBB/Sta
BBB/Sta
2/BBB
3/BB+
3/BB
2/BBB3/BB+
3/BB+
2/BBB
2/BBB
3/BB
3/BB
bbb+
bbb
bb
b+
bbbbb+
bbb
bbb
bbb
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
Yes
Yes
Path 3
Path 3
BB/Neg
BB/Neg
3/BB
3/BB
5/No floor
5/No floor
No
Yes
Path 3
Path 3
BBB/Sta
BBB/Sta
3/BB
3/BB
No
Yes
Yes
No
No
Path 3
Path 3
Path 3
Path 3
Path 3
BBB/Neg
BB+/Neg
BB+/Neg
BBB-/RWN
BB+/Sta
3/BB+
3/BB+
3/BB+
3/BB+
3/BB+
bbNo VR; IDR in line
with group
bbb
No VR; IDR in line
with group
bbb
bbb+
bbb-/RWN
bb+
Netherlands (3)
ABN AMRO Bank N.V.
ING Bank NV
ING Group
Rabobank Group
- Cooperatieve Centrale RaiffeisenBoerenleenbank BA
SNS Bank N.V.
SNS REAAL N.V.
Spain (3)
Banco Bilbao Vizcaya Argentaria (BBVA)
Banco Cooperativo Espanol S.A.
Banco Financiero y de Ahorros, S.A.
Bankia, S.A.
Banco Mare Nostrum S.A.
Banco Popular Espanol S.A.
Banco Santander, S.A.
CaixaBank, S.A.
Caja Laboral Popular Cooperativa de Credito
Caja Rural de Navarra, Sociedad Cooperativa de
Credito
Grupo Cooperativo Cajas Rurales Unidas
- Cajas Rurales Unidas, Sociedad Cooperativa de
Credito
Grupo Cooperativo Iberico de Credito
- Caja Rural del Sur, Sociedad Cooperativa de
Credito
Kutxabank, S.A.
Liberbank S.A.
NCG Banco, S.A.
Unicaja Banco, S.A.U.
Ibercaja Banco, S.A.
Sovereign Support for Banks
March 2014
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
20
Banks
Figure 5
European Path 2 & Path 3 Countries
Sov. Support- Base Case
driven IDR? Path
Current LT
IDR/Outlook
Current
SR/SRF
Current VR
Base Case Future
SR/SRF
Sweden (2)
Landshypotek AB
Nordea Bank AB
Skandinaviska Enskilda Banken AB
Svenska Handelsbanken AB
Swedbank AB
No
No
No
No
No
Path 3
Path 2
Path 2
Path 2
Path 2
A+/Sta
AA-/Sta
A+/Sta
AA-/Sta
A+/Sta
3/BB+
1/A1/A1/A1/A-
a+
aaa+
aaa+
5/No floor
2/BBB2/BBB2/BBB2/BBB-
Switzerland (3)
Credit Suisse AG
UBS AG
No
No
Path 3
Path 3
A/Sta
A/Sta
1/A
1/A
a
a
5/No floor
5/No floor
United Kingdom (3)
Barclays Bank plc
HSBC Bank plc
No
No
Path 3
Path 3
A/Sta
AA-/Sta
1/A
1/A
5/No floor
5/No floor
Lloyds Banking Group plc
- Lloyds Bank plc
- Bank of Scotland Plc
Nationwide Building Society
Santander UK plc
Standard Chartered Bank
The Royal Bank of Scotland Group plc
- The Royal Bank of Scotland PLC
- National Westminster Bank Plc
Yes
Yes
Yes
No
No
No
Yes
Yes
Yes
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
A/Neg
A/Neg
A/Neg
A/Sta
A/Sta
AA-/Sta
A/Neg
A/Neg
A/Neg
1/A
1/A
1/A
1/A
1/A
1/A1/A
1/A
1/A
a
a+ (AA- IDR in line
with group)
aaaa
a
aabbb
bbb
No VR; IDR in line
with group
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
Footnotes
1: RWP reflects pending acquisition by Aareal Bank AG, which is likely to conclude before downward revision of SRF. In this case, base case SR would be driven by
institutional support from Aareal and the bank would have no SRF.
Sovereign Support for Banks
March 2014
21
Banks
Figure 6
North America
Sov. Support- Base case
driven IDR? Path
Current LT
IDR/Outlook
Current
SR/SRF
Current VR
Base Case Future
SR/SRF
Bermuda (2)
Bank of N.T. Butterfield & Son Limited
Yes
Path 2
A-/Neg
1/A-
bbb-
2/BBB range
Canada (2)
BMO Bank of Montreal
Bank of Nova Scotia
Caisse Centrale Desjardins
Canadian Imperial Bank of Commerce (CIBC)
National Bank of Canada
Royal Bank of Canada
Toronto-Dominion Bank (The)
No
No
No
No
No
No
No
Path 2
Path 2
Path 2
Path 2
Path 2
Path 2
Path 2
AA-/Sta
AA-/Sta
AA-/Sta
AA-/Sta
A+/Sta
AA/Sta
AA-/Sta
1/A1/A1/A1/A1/A1/A1/A-
aaaaaaa+
aa
aa-
2/BBB2/BBB2/BBB2/BBB2/BBB2/BBB2/BBB-
Yes
Path 3
A/Neg
1/A
a-
5/No floor
Yes
Yes
Yes
Yes
Yes
Yes
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
A/Neg
A/Neg
A/Neg
A/Neg
A/Neg
A/Neg
1/A
1/A
1/A
1/A
1/A
1/A
aaaaaa-
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
Yes
No
No
No
Path 3
Path 3
Path 3
Path 3
A/Neg
AA-/Sta
AA-/Sta
AA-/Sta
1/A
1/A
1/A
1/A
aaaaaaa-
5/No floor
5/No floor
5/No floor
5/No floor
No
No
No
No
No
No
No
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
AA-/Sta
AA-/Sta
A/Sta
A/Sta
A/Sta
A/Sta
A+/Sta
1/A
1/A
1/A
1/A
1/A
1/A
1/A
aaaaa
a
a
a
a+
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
No
No
No
No
Yes
No
No
No
No
No
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
Path 3
A+/Sta
A+/Sta
A+/Sta
A+/Sta
A/Sta
A+/Sta
A+/Sta
AA-/Sta
AA-/Sta
AA-/Sta
1/A
1/A
1/A
1/A
1/A
1/A
1/A
1/A
1/A
1/A
a+
a+
a+
a+
aa+
a+
aaaaaa-
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
5/No floor
United States of America (3)
Bank of America Rhode Island, National
Association
Bank of America California, National Association
Bank of America Corporation
Bank of America Georgia N.A.
Bank of America Oregon, National Association
Bank of America, N.A.
LaSalle Bank Corporation (Formerly ABN AMRO
North America, Inc.)
FIA Card Services, N.A.
Bank of New York Mellon (The)
Bank of New York Mellon Corporation (The)
Bank of New York Mellon Trust Company, National
Association (The)
BNY Mellon National Association
BNY Mellon Trust of Delaware
Citibank (Banamex USA)
Citibank, N.A.
Citigroup Inc.
Goldman Sachs Group, Inc. (The)
JPMorgan Bank and Trust Company, National
Association
JPMorgan Chase & Co.
JPMorgan Chase Bank, Dearborn
JPMorgan Chase Bank, N.A.
Chase Bank, USA, N.A.
Morgan Stanley (1)
State Street Bank and Trust Company
State Street Corporation
Wells Fargo & Company
Wells Fargo Bank Northwest, NA
Wells Fargo Bank, N.A.
Footnotes:
1: Morgan Stanley's IDR remains on Stable Outlook despite it being on path 3 and its VR being below its IDR. This is because Fitch expects its VR to be upgraded before its
SRF is revised to 'No floor'
Source: Fitch
Sovereign Support for Banks
March 2014
22
Banks
Figure 7
Middle East and Africa Path 2 & 3 Countries
South Africa (2)
FirstRand Bank Limited
Investec Bank Limited
Standard Bank of South Africa Limited (The)
Sov. Support- Base case
driven IDR? Path
Current LT
IDR/Outlook
Current
SR/SRF
Current VR
Base Case Future
SR/SRF
No
No
No
BBB/Sta
BBB-/Sta
BBB/Sta
3/BB+
3/BB+
3/BB+
bbb
bbbbbb
3/BB3/BB3/BB-
Path 2
Path 2
Path 2
Source: Fitch
Sovereign Support for Banks
March 2014
23
Banks
Figure 8
APAC Path 2 & 3 Countries
Hong Kong (3)
Bank of China (Hong Kong) Ltd (1)
Chong Hing Bank Limited
Dah Sing Bank
Shanghai Commercial Bank Ltd
The Hongkong and Shanghai Banking Corporation
Limited (1)
Wing Hang Bank Limited
Sov. Support- Base case
driven IDR? Path
Current LT
IDR/Outlook
Current
SR/SRF
VR
Base Case Future
SR/SRF
No
No
No
No
No
Path 3
Path 3
Path 3
Path 3
Path 3
A/Sta
BBB+/Sta
BBB+/Sta
A-/Sta
AA-/Sta
1/A3/BB
3/BB
3/BB
1/A-
a
bbb+
bbb+
aaa-
1/5/No floor
5/No floor
5/No floor
1/-
No
Path 3
A-/Sta
3/BB
a-
5/No floor
Footnotes:
1: Base Case Future SRs reflect institutional support, in which case SRFs are not assigned
Source: Fitch
Sovereign Support for Banks
March 2014
24
Banks
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Sovereign Support for Banks
March 2014
25