S&P warns of European bank downgrades
European banks could be in line for downgrades to their credit ratings now that governments will force creditors to bear losses rather than taxpayers, a leading agency has warned. Standard & Poor’s said the introduction of new ‘recovery and resolution’ rules – under which banks will be rescued by bondholder ‘bail ins’, rather than state bailouts – would negatively affect its ratings on major European lenders. Banks could ultimately have their ratings cut by one or two notches depending on their ability to adapt to the legal reforms going through various jurisdictions, the agency explained. S&P said it was conducting a review of bank ratings that is due to be completed by the end of April, after which some banks may put on a negative outlook. The move brings S&P’s policy in Europe into line with its practice in the US. Last summer, it revised its rating outlooks on the holding companies of eight US banks deemed to be systemically important. S&P said it was responding in part to the looming introduction of the EU’s Bank Recovery and Resolution Directive, which is likely to be approved by the European Parliament later this year. Governments around the world have been trying to put creditors in line for future losses as they seek to avoid a repeat of the crisis of 2007-09, when taxpayers in western nations had to support their banks with hundreds of billions of dollars of aid. The new rules are intended to facilitate the shutting down of troubled groups while keeping critical services going – in an attempt to end the "too big to fail" problem that has dogged the financial system. "The urgency of these reforms varies by country, but we see those that suffered most during the recent financial crisis – the US and western Europe – at the forefront," said S&P. S&P noted that the UK and Switzerland had taken a "proactive stance" to prevent taxpayers bailing out failing banks in the future, and that the new EU directive was another "important milestone". Implementation of the legislation is expected for 2015 with mandatory bail-in features to follow later in the decade. The S&P report did not single out any banks for possible downgrades. However, it said that, of the top 100 banks globally, more than 35 benefited from a two-notch rating uplift because of government support – with another 30 enjoying a one-notch boost. A handful of other lenders benefited from rating uplifts of between three and six notches. Fitch, another rating agency, has signalled that it will issue a report on European banks by the end of the current quarter, covering the same issue.