The euro area’s planned banking union will be positive for credit grades of most of the region’s lenders even as it boosts costs for those in core countries, according to Fitch Ratings.
With the European Central Bank as a single supervisor, the proposals also install a mechanism for crisis management and resolution for more than 6,000 lenders, Fitch said. Central deposit insurance and resolution funds may follow the initial steps due in 2015, with full union set for 2018 or 2019, according to Fitch analysts led by Bridget Gandy.
“Progress toward banking union will be ultimately positive for the vast majority of banks’ viability ratings,” according to the report. The single supervisor may prompt the emergence of more pan-European networks, meaning “banks in deposit-rich countries would then have to pay more to compete for funding than they currently do,” Fitch said.
The possibility of higher contributions to central resolution funds and enhanced reporting requirements from the ECB may also push up costs for banks in stronger nations, Fitch said.
Europe is seeking to loosen the links between banks and their sovereigns, so that collapsing lenders don’t threaten national financial stability and insolvent countries don’t endanger their banking systems.
Centralized decision making on when and how struggling lenders should be wound up, combined with investors taking losses before taxpayers put in cash, all aim to improve assessments of crises, reduce political influence and reduce the costs of banking collapses.
While there isn’t likely to be a short-term improvement in viability ratings -- a gauge of banks’ ability to survive without outside support -- the “indirect and more long-term effect on viability ratings should be positive,” Fitch said.