Fifty-nine percent of the 64 investors that responded to our survey said they were undecided about whether the net impact of resolution regimes and tighter regulation (including higher capital requirements) is favourable for bank creditors. Twenty-two percent considered the net effect positive because it means banks are stronger or it is easier to price their risks. But 19% consider the net effect unfavourable because sovereign support has reduced, and because it is not yet clear how the new framework will operate.
The survey results and recent market price turmoil illustrate that investors are still assessing the appropriate risk-pricing of bank equity and various forms of debt. Fitch expects this to continue for the next couple of years, until the operation of the new supervisory and resolution frameworks becomes clearer.
Enabling the resolution of failed banks without need for sovereign funds is a cornerstone of the BRRD. Fitch removed sovereign support from most EU banks in May 2015. This resulted in downgrades of 48 EU banks and their subsidiaries. The number of downgrades and their severity were reduced considerably by the banks' improving stand-alone strength, largely resulting from tighter regulation, notably Basel III.
EU bank capitalisation has improved substantially in recent years and is well above pre-crisis levels. The trend remains positive. The European Banking Authority's 3Q15 dashboard, published on 23 February 2016, shows a clear improvement in capital adequacy ratios reported by 154 banks participating in its study. Seventy-three percent of banks reported common equity Tier 1 ratios of 11%-14% at end-September 2015, a sharp improvement on 39% at end-2014.
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