Fitch Ratings says weakening government support will exert pressure on around 30 EU banks' Short-Term Issuer Default Ratings (IDRs) in 2Q15 despite improvements in intrinsic liquidity profiles at many banks across the sector. However, for a small number of the currently support-driven investment grade banks, liquidity profiles may be sufficiently strong for Short-Term IDRs to be unaffected, even if Long-Term IDRs are downgraded.
Short-term IDRs reflect a bank's vulnerability to default in the short-term (up to 13 months) and are mapped to Long-term IDRs in accordance with a correspondence table under Fitch's criteria. The table has three crossover points where either of two Short-Term IDRs can be assigned for a given Long-Term IDR: 'A+', 'A-' and 'BBB'.
Reductions in reliance on short-term wholesale funding and larger liquid asset buffers, complemented by more sophisticated liquidity risk management have improved many banks' liquidity profiles over the past several years. Basel III initiatives such as the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), along often with other supervisory tools, complement banks' own tools and stress tests and mean that many banks' stand-alone funding and liquidity positions are becoming structurally more resilient than pre-crisis. Over time, therefore, it is becoming more likely that the higher of two Short-Term IDRs at crossover points will be assigned.
