Systemic risk in a number of banking systems has increased in the last six months, driven by a combination of rapid loan and asset price growth and/or exchange rate appreciation, warns Fitch Ratings.

“Over 40% of rated sovereigns now exhibit either ‘moderate’ or ‘high’ vulnerability to potential systemic stress, up from less than 30% in the last report” says Richard Fox, senior director in Fitch’s Sovereign team.

To a large extent the increase reflects the inclusion of 2005 data for the first time, which captures advancing credit cycles in a number of countries, the rating agency noted. It also follows a slight adaptation of the methodology as applied to Central and Eastern Europe, where it is more difficult to assess trend credit levels. Three-quarters of CEE countries are now judged to exhibit either ‘moderate’ or ‘high’ vulnerability to potential stress.

Six countries now exhibit the highest level of vulnerability. “Of these, Iceland is the most extreme case, with huge credit growth and major real exchange rate, equity and property price increases,” Fitch said. “The picture in Ireland is similar in nature though not in degree.”

“Trends in Norway and South Africa, the latter having been highlighted in the last report, also give cause for concern,” it added. “However, all these countries have ‘high quality’ banking systems, putting them in a strong position to absorb the fallout that would follow from any shock that causes the credit cycle to turn.”

“By contrast, Russia and Azerbaijan, which also move into the highest vulnerability category due to the combination of rapid credit growth and appreciating real exchange rates, have weak Banking System Indicators,” it noted.

Twelve countries move to the ‘moderate’ from ‘low’ vulnerability category. These include the United States and Luxembourg, with the result that there are now no countries in the lowest risk segment. Three oil producers – Saudi Arabia, Qatar and Bahrain – also move into the ‘moderate’ risk category, reflecting intermediation of record high oil revenues – as do two emerging markets – Turkey and Vietnam. Canada ranks in the low vulnerability category.

The Banking System Indicator measures a banking system’s intrinsic ‘quality’ or ‘strength’, abstracting from potential sovereign or shareholder support. Only one Banking System Indicator has changed since the last report – Iceland, which improves to ‘high quality’ from ‘adequate’. There have also been improvements in Japan, Poland, Saudi Arabia and Turkey, but not enough to affect their BSI scores, Fitch noted. Canada’s system ranks as ‘adequate’.