European banking union is essential to long-term confidence in the region’s banking sector, says Fitch Ratings in a new report.

The rating agency says that it does not anticipate any short-term impact on European banks’ credit ratings from a move toward banking union. But, it says that, for the vast majority of European banks, progress in that direction should eventually be a credit positive.

Additionally, if the European Central Bank (ECB) establishes itself as an authoritative regulator, the comparability of banks’ risk reporting should improve, Fitch says.

Coupled with greater transparency about how a bank would be resolved, “this should improve investor confidence, resulting in better access to the capital markets for banks and better pricing,” it says.

Yet, Fitch also says that some banks, and their domestic borrowers, in the stronger eurozone countries could be adversely affected by banking union.

“A single supervisor may lead to the creation of more pan-eurozone banking networks, collecting deposits in one country and lending in another,” it explains. “This would be an important shift from locally funded operations and would mean that banks operating in deposit-rich countries would have to pay more to compete for funding, and would pass this cost on through their lending rates.”

The report says that France would likely be the largest banking system by assets under direct ECB supervision; whereas Germany would have the largest number of banking groups regulated directly by the ECB. However, in Germany’s case, about 40% of its retail sector, such as local savings and cooperative banks, are likely to remain under national supervision, it says.

“Banking union is a building block for the long-term stability of the eurozone but it will take time,” says Bridget Gandy, co-head of EMEA Financial Institutions at Fitch. “It should help level the playing field to create a sustainable platform for growth for divergent national economies. Ties between banks and their sovereigns will remain, but banking union should loosen them somewhat.”