Efforts to introduce new mechanisms for resolving failing banks are proceeding in Europe, but, for now, banks are likely to benefit from government support, a new report says.
The report from Fitch Ratings says that the introduction of bail-in legislation in Europe “has taken a step forward” with the publication of a new discussion paper from the European Commission, which seeks technical input on the mechanics of a debt write-down tool (or bail-in), before finalizing the text of the its resolution legislation proposal.
Bail-in proposals are intended to impose losses on creditors in the event that a bank fails, and they are being sought in the wake of the financial crisis, which required large government bailouts for a number of European banks. Policymakers are seeking to ensure that this sort of taxpayer support isn’t required again, however Fitch says that it believes governments’ willingness to provide support for banks will remain strong in the near-term.
According to Fitch, the EC paper discusses how best to ensure that losses are imposed on senior creditors when resolving large and complex financial institutions, without disrupting financial stability, while also maintaining essential services and protecting depositors. This feat is impossible under current insolvency legislation, it says.
The rating agency says that it expects the commission to put forward its resolution proposals at the June G20 meeting, and to publish proposed legislation later this year. Legislation could possibly be finalized by the European Union in 2013, it suggests.
Still, Fitch also says it could take several years for this legislation to be adopted by the various EU states, and for regulators and banks to implement the practical aspects of recovery and resolution frameworks. “It would make sense for full implementation to happen around the same time as Basel III is due for full implementation in 2019,” it says.
“The proposals are part of a broader trend for governments to reduce the amount of implicit support for the banking sector. However, we believe these efforts are focused on potential support in a future crisis and that the current willingness to provide support remains high across Europe,” it says.
Research by Fitch suggests that the existence of government support reduces the likelihood of a bank default approximately tenfold. And it says that it currently has more than one third of its western European bank ratings at higher levels than they would be if bail-in legislation was in full force, in some cases by several notches.