Fitch Ratings says in a new report that EU state-sponsored wind-down institutions would likely benefit from additional state support if needed, despite resolution legislation.
The implementation of the EU's Bank Recovery and Resolution Directive (BRRD) and practical mechanisms being put in place should ensure that resolution of systemically important European banks will be possible without state support. Fitch believes that we are reaching a point where state support for senior unsecured creditors in EU banks will no longer be reliable in most cases and, as announced in March 2014, the agency expects to take action on support-driven ratings of European banks by end-June.
However, there are some specific cases of state-sponsored banks, including EU banks in orderly wind-down, where Fitch will continue to factor state support into its ratings.
Fitch rates 11 institutions that are in state-sponsored wind-down following shortfalls in capital and/or liquidity that arose from the financial crisis. We believe that states will provide further financial support if necessary to complete the institutions' orderly wind-down, although to varying extent according to their diverging form, support structures and wind-down strategies. Most of the wind-down institutions' Long-Term Issuer Default Ratings (IDRs) will remain investment-grade.
While some institutions benefit from state guarantees for all liabilities, others have partial guarantees or commitment to wind them down in an orderly way under state ownership. Fitch considers that the risk of senior creditor "bail-in" remains low for these entities but not impossible. Absent state guarantees, their capacity for payment of senior unsecured debt is weakened by the introduction of senior creditor bail-in as a prerequisite for exceptional additional state support, meaning that full support ability may no longer be as strong as it was before BRRD implementation.
For one rated bank in wind-down, Oesterreichische Volksbanken-Aktiengesellschaft (OeVAG; B/RWN) Fitch's view is that state support can no longer be relied upon. This is driven by government statements regarding OeVAG and its plan to spin off OeVAG and the bank's non-core assets and reduce it to a wind-down entity without a banking licence or additional state support during 2015.
